ATB Economics has been collaborating with Peter Tertzakian and the Studio.Energy team on a 4-part series on Canada's GDP. So far, we’ve unpacked what GDP is and why it matters in the post-rupture world. Today, we focus on the highlights from part 3: Canada’s GDP Dilemma - The Illusion of Growth. 

You often hear that Canada’s GDP per capita has been lagging, falling further behind the U.S. That’s true, but it misses an even more important point. Looking under the GDP hood, we should be more concerned with what’s been driving Canada’s paltry GDP growth over the last decade.

The limits of consumption-driven growth

For the last ten years, Canada’s real GDP per capita has grown at a modest annual pace of roughly 0.6%. This growth has been driven primarily by consumer and government spending, rather than investment and exports. This will be difficult to sustain.

• Household spending: Households have done more than their share of heavy lifting. But with high debt levels and many facing mortgage renewals at higher rates, consumers only have so much more to give. Further, population growth is slowing to a crawl. We can no longer rely on a surge in immigration to boost overall spending levels.
• The public sector: Government spending has risen significantly over the last decade, adding to GDP growth. Government spending is needed for public services like education and health, especially with a fast-growing population. It can enable growth, but not substitute for it. There are limits to how much the government can drive growth without a parallel increase in private capital.   

The missing ‘structural’ pieces: private investment and exports

The most concerning indicators are found in the state of business investment and international trade.

On a per-person basis, real business investment in Canada has failed to grow over the last two decades. Overall, this weakness is not just confined to oil and gas, but pervasive across industries; Statistics Canada finds that it’s the primary culprit for our productivity slowdown since 2015.

Instead of investing in productive assets like machinery or new factories, a greater share of capital has flowed towards housing. Today, the stock of residential assets in Canada exceeds that of non-residential assets. We need more homes to address affordability challenges in Canada. But residential assets do not expand export capacity or raise productivity in the same way as new mines, manufacturing plants, data centres, petrochemical facilities, ports, railways, pipelines, or power infrastructure.

Beyond the ‘bricks and mortar’, Canada also trails in intangible capital formation, including intellectual property and businessR&D.  

On the trade front, the volume of exports per capita has hardly budged since 2000. More can be done to expand access to overseas markets by building export infrastructure. In the energy sector, recent examples include the Trans Mountain Expansion, LNG Canada Phase 1, and the Ridley Island Propane Export Terminal, but we need sustained investment to scale into higher-value markets.

The two areas are linked: without investment today, businesses will lack the capacity to export into global markets tomorrow.

The strength dividends

Canada’s economy cannot just get bigger; it must get stronger. To achieve this, the next leg of growth must be anchored in investment that builds productive capacity.

The federal government has acknowledged the challenge. Prime Minister Mark Carney and his cabinet have set an ambitious target to enable C$1 trillion in new investment over the next five years. Budget 2025 and Bill C-5 recognize that we must address protracted approval timelines and regulatory uncertainty to get major projects across the finish line. Moreover, PM Carney has announced a target to double non-U.S. exports over the next decade. In other words, the problem has been identified, targets have been set, and now we await execution.

This wraps up the first three parts of our GDP series with Studio.Energy. In part 4, we’ll examine what expanding energy export capacity could mean for Canada’s economy.  

Answer to the previous trivia question: Alison Redford was the first woman premier of Alberta (October 7, 2011 to March 23, 2014).

Today’s trivia question: What foundational work of economics was published on March 9, 1776?