TD: Canada's standard of living lagging behind other advanced economies, despite high immigration levels

Canada's standard of living is falling behind the U.S. and other developed countries despite population growth driven by high immigration levels, found a new report from TD. 

The report, titled "Mind the Gap: Canada is Falling Behind the Standard-of-Living Curve" is authored by economist Marc Ercolao. It makes the case that Canada's standard of living performance (or real GDP per capita) is lagging, despite solid economic growth numbers.

According to Ercolao, this underperformance is not new, but is tied to "longstanding productivity issues." The report adds that the lagging in GDP per capita is getting worse since the COVID-19 pandemic. 

Canada's economic growth rate has been steady at just over 2% per year over the last decade, roughly matching the United States. These numbers were also above the G7 average of 1.4% growth. 

However, when the numbers are adjusted to reflect Canada's rising population, Canada's real GDP per capita has actually been declining for many years.

At the start of the 1980s, Canada enjoyed an edge against the average of advanced economies of almost US$4,000 while keeping fairly level with U.S. estimates. By 2000, this advantage had all but evaporated, and U.S. per capita GDP had pulled ahead of Canada’s to the tune of over US$8,000. Still, since the 2014-15 oil shock, Canada’s performance has gone from bad to worse. Canadian real GDP per capita has grown at a meagre rate of only +0.4% annually, paling in comparison to the advanced economy average of +1.4%.

The report made it clear that population growth, which raises the denominator in the calculation, is not the cause of the decline in real GDP per capita. Ercolao argues that Canada's current rate of 3% annual growth in population is a more recent development, while real GDP has been trending down for decades. 

According to the report, there are other factors to blame for Canada's poor productivity showing. Among them are a comparative lack of investment in nonresidential structures, machinery & equipment, and intellectual property. Another is a decline in research and development spending, which has risen in all other G7 countries while declining in Canada. The report also blames inefficient regulation and tax policies.

Within Canada there is more distinction between provincial economies. Provinces with a robust oil industry, with its "high capital intensity," were shown to have higher levels of GDP per capita. Those provinces were Alberta, Saskatchewan and Newfoundland and Labrador. 

The TD report ended on a pessimistic note, stating that "little turnaround in Canadian living standards appears to be on the horizon." In the short-term, Ercolao predicts economic contractions until the end of 2024 and for federal immigration targets to prop up Canada's population growth.

Among developed economies, Canada is one of the few to have not recovered from pre-pandemic levels of per-capita GDP. In the long term, Ercoloa states that the OECD predicts Canada will come in last among its members in real GDP per capital growth until 2060. "This underscores that without fundamental changes to our approach to productivity and growth, Canada’s standard-of-living challenges will persist well into the future," he argues. 

The report concluded: 

It is becoming increasingly difficult to ignore Canada’s widening real GDP per capita gap versus other major economies. The issue has largely flown under the radar as the Canadian economy seemingly masked ongoing productivity issues with what appears to be unsustainable growth via adding more workers. The crux of the problem remains the same: a sagging performance in labour productivity.