Posthaste: Canada’s standard of living is falling behind the rest of the developed world

Good morning,

What looks like a solid economic recovery from the pandemic actually masks an underperformance in standard of living that is among the worst of advanced economies, says a new report by TD Economics.

“Economic growth does not necessarily equate to economic prosperity,” said TD economist Marc Ercolao.

“While aggregate GDP is one thing, standard-of-living is another, and when Canada’s economic performance is adjusted for the rising population count, it reveals a picture that leaves much to be desired,” said Ercolao.

On the world stage, Canada is one of the few advanced economies that has not recovered its pre-pandemic standard of living, measured by real gross domestic product per capita.

It wasn’t always so.

At the start of the 1980s Canada’s per capita GDP was almost US$4,000 above the average of advanced economies, but by 2000 this advantage had all but disappeared, said Ercolao. That year U.S. per capital GDP exceeded Canada’s by more than US$8,000.

Since the 2014-2015 oil shock, “Canada’s performance has gone from bad to worse,” gaining a mere 0.4 per cent a year compared with an advanced economy average of 1.4 per cent.

So what’s the problem?

At the core of the issue is sagging productivity, something Canada has been battling for years, said Ercolao, who identifies several forces behind this.

“Over the last 20 years, Canadian R&D investment has been in perpetual decline, while all other G7 countries have seen increases to varying degrees,” he said.

In 2021 Canada’s R&D spending was about 1.7 per cent of GDP, half the share of America’s and lower than most other countries.

But their status has been slipping as well since last decade’s oil crash and the industry’s shift away from large projects and investment.

“Unfortunately, for Canadians, little turnaround in Canadian living standards appears to be on the horizon,” said Ercolao.

The issue has flown under the radar because productivity problems have been masked by growth from the influx of new workers, but, “it is becoming increasingly difficult to ignore Canada’s widening real GDP per capita gap versus other major economies,” he said.

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CREA slashed its forecast for home sales, predicting they would be down 6.8 per cent in 2023. Home sales are expected to rise over 11 per cent in 2024, less than previous forecasts.

“With the Bank of Canada unexpectedly ending its pause on rate hikes in June and hiking again in July, a major source of uncertainty has returned to the housing market,” the CREA said in a statement on Friday, July 14.

Signs of that showed up in June’s data as the rebound in the housing market slowed.

Sales rose by 1.5 per cent (seasonally adjusted) after April and May saw gains of 11 and 4.6 per cent, respectively, said Desjardins principal economist Marc Desormeaux, who brings us today’s chart. Sales increased in half of local markets compared with 70 per cent in May, with Toronto sales falling the most since September 2022.

New listings rose for the third straight month, a trend Desormeaux should be monitored closely.

“If the recent listings trends persist amid higher interest rates and softening resale activity, that presents clear downside risk to Canadian home prices,” he wrote.

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