World Economy

Canada Growth Waning

Potential growth is expected to remain low at about 1.7% over the medium-term
The memo says increasing the labor force participation of women could boost annual GDP to as much as 1.9%.The memo says increasing the labor force participation of women could boost annual GDP to as much as 1.9%.

Canada is coming off a stellar year for economic growth, but an internal memo for the finance minister says the party's over.

A note for Bill Morneau, obtained by CBC News under the Access to Information Act, forecasts average annual growth of just 1.7% this year through to 2022.

That slower-growth number has big implications for federal tax revenues and annual deficits, and suggests Morneau has little wiggle room for spending in budget 2018.

Canada’s economy has been firing on all cylinders for about a year, averaging 3.7% growth, with the jobless rate recently hitting a record low. "This very rapid pace of growth is not sustainable going forward as … transitory factors start to wane and interest rates will likely continue rising," says the bleak Oct. 4 note, ordered by Morneau and drawing on internal economic analyses.

"Potential growth is expected to remain low at about 1.7% over the medium-term …."

Morneau added that the Liberals signaled "more modest" growth projections for 2018 in their fall economic update. That October economic statement pegged GDP growth at 2.1% in 2018, with lower projections—between 1.6 and 1.8%—in the years after that.

Persistent Challenges

The Liberal government had cited 2017's rosy economic outlook as the reason for moving up plans to index the Canada child benefit to inflation by two years. The $23-billion program sends monthly cheques to most families with children will now be indexed to inflation starting in July 2018.

"The kinds of things we've done to help Canadian families has had a real difference on our economy, a positive impact on families and on jobs," Morneau told reporters on Friday at the Liberal cabinet retreat in London, Ont.

"But we are always facing challenges. We face long-term demographic challenges, we face global risks that might impact global growth. So we need to be focused on how we can continue growth in our economy."

The department's internal assessment, made three months ago, is generally in line with current forecasts by private-sector economists, who note slow growth in Canada's labor force because of an aging society, and the lack of business investment in equipment needed to boost labor productivity.

Slow Pace Inevitable

"The main message here is the strength that we had in 2017 is an outlier," said Craig Alexander, chief economist with the Conference Board of Canada, who reviewed the memo for CBC News.

"Canada can't sustain economic growth rates of 3% or higher.… The pace of economic growth inevitably will slow, and the government has to plan for it."

The memo, with sections blacked out as "advice", says Ottawa has options for goosing the economy, including policies to keep more older Canadians in the workforce; to boost the number of working women; and to open the doors to more immigrants.

But these options would nudge growth to perhaps 2%, still a big drop from the heady years between 1995 and 2008 when GDP averaged 2.9% annually, says the document.

The bureaucrats who wrote the memo do not offer specific policy options, although they note that by increasing the eligibility age for private and public pension plans, such as the Canada Pension Plan, Ottawa could keep older Canadians working longer.

But that option may be politically toxic, since the new Liberal government in 2015 reversed a Harper-era policy that raised the eligibility age for old age security.

Women’s Role

The memo says increasing the labor force participation of women could boost annual GDP to as much as 1.9% over the medium term.

And Morneau has confirmed to CBC News that budget 2018 will have programs and policies to encourage more women workers, including providing better child-care options.

The Liberal government in November announced that annual immigration levels will rise from 300,000 in 2017 to 340,000 in 2020, to help offset Canada's aging demographics. The memo says adding 15,000 skilled immigrants each year could add one-tenth of a percentage point each year to GDP growth.

But the document cautions: "There is no silver bullet solution to raising Canada's productivity growth."

Some economists have been expecting a hike in the bank rate next week as Canada's economy appears to be nearing capacity, thereby increasing the risk of inflation. But with a cloud hanging over the NAFTA trade deal, there's less certainty about an immediate increase. The memo's analysis, focusing on fiscal rather than monetary policy, assumes continued increases in rates.

Alexander said the memo's low-growth forecasts should prompt Morneau to deliver a fiscally cautious budget.


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