With both growth engines down, Canada’s economy is adrift

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For the past decade or so, Canada’s economy has been flying with one engine down. It sort of worked, but then the second one sputtered out too.

We’re now in that torturous phase while we wait for something to whir back to life. A “transition period,” if we’re trying not to scare people.

There are two ways an economy can grow over the long term – by increasing the country’s labour force or by improving productivity. More workers or more output per worker. Ideally both. Canada is doing neither.

We’ve been famous laggards on the productivity file forever, especially the past decade. Booming population growth helped mask the problem, giving the illusion of good economic health, at the aggregate level at least.

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But immigration curbs put an end to that quick fix.

If the country is to expand its economy, it will have to do so the hard way, by finally cracking the productivity problem.

More than a year after the Carney government set out to build a stronger, more self-reliant economy, the numbers are still moving in the wrong direction.

Labour productivity in the business sector declined by 0.5 per cent in the first quarter, Statistics Canada reported a few weeks ago. It was the second straight quarterly decline.

“That number was very disappointing,” said Sal Guatieri, a senior economist at the Bank of Montreal. “If we don’t see some upturn in Canada’s productivity numbers soon, I’ll be pretty worried about our long-term growth prospects.”

The urgency comes from the fact that the country’s population is now shrinking for the first time on record. The next two years will serve as stress test as to whether the Canadian economy can function without the crutch of heavy immigration.

The course correction on immigration, of course, is meant to reverse pandemic-era policies that drew in an influx of temporary foreign workers and international students. At the peak of the surge, Canada’s immigration rate was four times higher than baseline, for reasons that were never entirely clear.

Now, with restrictions in place until at least the end of 2027, population growth is expected to be roughly zero for the next couple of years.

And with that, Canada lost both its drivers of long-term economic growth. So, it’s little surprise that growth has flatlined. Bloomberg’s latest economic survey pegs the consensus GDP growth forecast at just 0.7 per cent for 2026.

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Cue the great Canadian economic revival. That’s the idea, anyway. The hostility of the Trump administration toward North American free trade has forced a rethinking of Canada’s economic way of life. Hey, maybe we should finally get around to dealing with that pesky productivity gap.

What is our problem, anyway? We’ve been ruminating on Canadian productivity for years, decades even, and it’s only gotten worse. In 2000, Canada’s output per hour worked was 20 per cent below what the U.S. economy generated. Today, Canada is 30 per cent below the U.S.

There’s the usual list of culprits. Too little competition. Excessive regulation. Maybe not enough fire in our bellies.

It’s really a story of investment. Lack thereof, rather. Canadian companies invest less in their businesses and are less productive as a result. Simple.

Investment in machinery and equipment, for example, is about 20 per cent lower today than it was 10 years ago, on a per-worker basis. Canada also badly trails its peers on research and development spending.

We are currently in the middle of another world-changing wave of innovation with the potential to shape a new age of productivity growth, much like the mass adoption of the internet did in the 1990s.

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The early signs already point to Canada falling behind. Artificial intelligence-related spending accounted for around 30 per cent of real GDP growth in the U.S. last year, and just 5 per cent in Canada, according to a recent Desjardins report.

Any way you look at it, the last decade has been a disastrous one for investment in Canada. But we can’t ignore how much a breakdown in the trade relationship with the U.S. is to blame.

Since 2016, employment growth in Canadian industries that cater to U.S. consumers has plateaued at just 2.8 per cent, according to Statistics Canada. All other industries together have had job growth of close to 20 per cent.

Ten years into the protectionist era U.S. President Donald Trump helped usher in, and Canada is still in the early stages of adapting. The dilemma facing Canada is how to spur investment in a climate designed to stifle it. Mr. Trump is explicit in his desire to lure capital away from Canada.

“The ongoing trade war weighed heavily on today’s productivity numbers, with the largest declines occurring in goods-producing sectors, notably manufacturing, agriculture and construction,” Desjardins economist LJ Valencia said in a note.

There are some indications that corporate Canada is getting on with things. Earnings call transcripts show that tariffs are rarely being discussed any more.

It would be nice to get at least one of the economy’s engines back up and running before gravity does its thing.