2023 will be remembered as a bad economic year for Canada
As 2023 comes to a close, three “Is” sum up Canada’s economic policy failures: inflation, immigration and investment. Voters are angry and are looking for better answers than their political leaders have been delivering, whether in Europe, the U.S. or Canada.
Let’s start with inflation. Yes, inflation rates are dropping, as politicians point out. But consumers are underwhelmed. They worry about price levels, not just rates of change. And after their recent sharp rise, prices aren’t going back down, not unless there’s deflation, which rarely happens. Seasonally adjusted, consumer prices have risen 14.3 per cent since January 1, 2021. When it comes to necessities — three-fifths of the average household’s budget — food prices are up almost 20 per cent, transport costs 15.5 per cent and shelter costs 13.4 per cent. For low-income Canadians, whose budgets go mainly to necessities, it’s even worse.
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When inflation drives spending above income that spells “misery,” as Dickens’ famous Mr. Micawber reminded us in David Copperfield. And that’s what has happened in this country. From January 2021 through last month, the hourly wage rose just 10.8 per cent (from $30.75 to $34.08). With prices up 14.3, that means inflation-adjusted wages declined 3.5 percentage points, spelling misery for many.
Because prices have risen since the pandemic in many countries, interest rates have climbed back to pre-2008 levels as central banks fight inflation. In Canada, the five-year conventional mortgage rate is up almost four points to 7.04 per cent. Homeowners renegotiating their mortgages could face an additional $225 in monthly payments for every $100,000 they owe.
Immigration was another sore point in many Western countries this past year. In Europe, a backlash against it has seen voters turn to right-wing parties promising to stem the inflow. The U.S. Congress is grappling with a surge of almost 2.5 million illegal immigrants that swarmed the southern border in 2023. Canada’s net inflow this year was 1.13 million permanent and non-permanent migrants.
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This huge increase in net migration is raising the eyebrows even of Canadians normally quite tolerant of bringing people from afar. With lengthening waiting times in health care and shortages of housing, support for such massive migration is dwindling. In response, the federal government recently made it more expensive for foreign students to attend post-secondary institutions in Canada.
That’s too little, too late. With rising rents this past year, shelter costs are more than 30 per cent of pre-tax income for 43 per cent of new renters vs. just 30 per cent of existing renters. The 2023 growth in the occupied housing stock — 194,000 units — is unable to keep up with the 390,000-household surge in migrant demand for homes (based on the Canadian average of 2.9 persons in each household). In contrast, in 2016-19, before turbo-charged immigration, the housing stock increased by an average of 170,000 units, which kept pace with a net inflow of 140,000 households needing a place to live.
As for the third “I,” investment: Canada registered economic growth of just per cent this past year, and that was solely because of our population spurt of 3.2 per cent. Our per capita real GDP “growth” was minus 2.2 per cent. That’s right, Canadians are poorer in December 2023 than they were in December 2022. By comparison, U.S. per capita GDP rose 1.9 per cent this year, so we’re falling further behind the Americans.
Our declining labour productivity is due to two factors: over-the-top immigration and lack of investment. As former Bank of Canada governor David Dodge has pointed out, mass migration of unskilled workers pushes wages down, which enables many low-productivity firms to stay in business. And investment as a share of GDP has declined since 2015 in many sectors, falling further behind the OECD and the United States. The lack of investment is critical: businesses don’t adopt the latest capital, resulting in high unit costs that make it hard to compete in international markets.
Even worse: inflation has made investment even costlier. The prices of capital goods have risen dramatically since January 2021: 12.8 per cent for non-residential and 15.1 per cent for residential investment. With interest rates and corporate and property taxes all higher too, companies are discouraged from buying new capital — except for heavily subsidized green technologies. And with our severe regulatory climate, projects are much more expensive to complete. On December 5, the Canadian Energy Regulator turned down a request by the federally-owned Trans Mountain Corporation to install a smaller pipe for 2.3 kilometers of its length due to high rates of water ingress encountered drilling through hard rock. The company has asked the CER to reverse its decision so as to avoid a two-year delay and another $2 billion in cost, which is already up to $30.9 billion. A reply by CER is due in early January.
Putting all the “I’s” together — inflation, immigration and investment — 2023 will be remembered as a bad economic year for Canada.
Next week: what can we expect for 2024? In the meantime, enjoy the holidays, everyone.
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