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Mind the Gap:
Canada is Falling Behind the Standard-of-Living Curve

Marc Ercolao, Economist

Date Published: July 13, 2023




  • Despite turning in solid headline growth in recent years, Canada has lagged behind the U.S. and other advanced economies in terms of standard of living performance (or real GDP per capita).   
  • This underperformance accelerated after the 2014-15 oil price shock and has continued in the wake of the pandemic.  What’s more, little turnaround appears to be on the horizon. 
  • There may be a tendency to pin the blame for Canada’s sagging per-capita showing on the country’s rapidly-growing population base given that it has inflated the denominator of the calculation.  However, at the crux of the problem is insufficient growth in the numerator, which in turn is tied to longstanding productivity issues. 
  • Regionally, commodity-based economies (Alberta, Saskatchewan, and Newfoundland & Labrador) continue to record the highest per-capita GDP levels, but their status as leaders has come under some pressure over the past decade.  Post-pandemic, only British Columbia and PEI have managed to recover back to 2019 GDP per capita levels.
Chart 1 shows annual GDP growth for Canada and G7 nations over the 2011–2019 period and the 2020–2022 period. In 2011-2019, Canada's annual GDP growth averaged 2.2%, the same as the U.S. and greater than other countries. In the 2020-2022 period, Canada's annual GDP growth slipped to 1.1%, below the U.S. (1.7%) but still above other G7 nations.

By most metrics, Canadian economic growth carries a solid historical track record. Even in the face of the pandemic-induced downturn, supercharged immigration and robust population helped to fuel a swift recovery, with especially sizeable impacts recorded in both housing and consumption. The impetus infused by a rising number of households – both in terms of demand and labour supply – goes a long way in explaining the recent resiliency in Canada’s domestic economy, even during the Bank of Canada’s aggressive tightening campaign. 

Economic growth does not necessarily equate to economic prosperity. 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. This country’s lagging standing in per-capita GDP is not new, but it has been worsening since the pandemic.  

Real GDP Per Capita – Looking Under the Hood

Chart 1 shows average historical growth performance, both within the G-7 as well as pre- and post-pandemic.  In short,  it puts Canada in a relatively favourable light.  In the decade ahead of the pandemic, Canada matched the U.S. tit-for-tat in terms of average growth at just over 2% per year, above the 1.4% G-7 average. And in the post-pandemic years, the country managed to shake off among the deepest contractions in 2020 to record the second fastest average expansion.  A key driver of the outperformance has been the country’s longstanding trend of strong population gains, which have easily outpaced those of other advanced economies (chart 2).  The Canada-G7 gap on headcount has swelled further since 2020. 

But when adjusting for the rising population, Canada’s real GDP per capita has been deteriorating for many years (chart 3). 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%.

Chart 2 annual population growth for Canada and G7 nations over the 2011–2019 period and 2020–2022 period. Canada has the highest average population growth in both periods, 1.1% and 1.2%, respectively. Japan has the lowest population growth in both period, -0.1% and -0.3%, respectively. The 2011–2019 average for the remaining countries is 0.4% (and 0.2% in 2020–2022). Chart 3 highlights the evolution of Canada, U.S. and Advanced Economies' real GDP per capita. In 1980, advanced economy real GDP per capita was $26,650, Canadian real GDP per capita was $30,338, and U.S. real GDP per capita was $32,016. By 2022, Canada now has the lowest GDP per capita ($49,369), followed by advanced economies ($53,292), and finally U.S. at $64,661.

So, Why The Sagging Performance In Real GDP per Capita?

At first glance, it may be easy to point the finger at rapid population growth as the solo driver of poor per-capita GDP given that it has inflated the denominator of the calculation. However, this is an oversimplification that masks the true story.  Canadian headcount is currently running at a historic 3% y/y pace, but that is a very recent development. Indeed, average population growth since 2020 (1.2%) has only run a hair higher than its pre-2000 pace. In contrast, real GDP growth has been trending downwards since the 1980s.  This implies that the real culprit is insufficient growth in the numerator (real GDP).  In other words, Canada was able to sustain higher GDP growth rates in prior decades at population growth levels similar to today.

At the core of the issue is a sagging productivity showing that has been plaguing the Canadian economy for many years despite the well-intentioned moves of this countries’ policymakers to try and address it. When measured on a real GDP per hour worked basis, Canadian labour productivity has been trailing behind its peers, notably the U.S. Even in the face of the productivity woes, Canada has been able to sustain a higher level of output in recent years through both an unsustainable pace of job creation and in total hours worked.

The Culprits Behind Canada’s Lagging Productivity

A number of factors are often blamed on Canada weak productivity showing. For one, investments in nonresidential structures, machinery & equipment, and intellectual property have been lackluster since 2015. The use of these inputs makes labour more effective, and a comparison to trends stateside shows significantly weaker capital intensity north of the border (chart 4). 

The problem can be also attributed to a decline in research  & development (R&D) spending, which has led to an “innovation gap”. 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. This issue is being compounded by already-low absolute levels of R&D investment as a per cent of GDP. As of 2021, Canadian R&D spending accounted for roughly 1.7% of GDP, half of the current U.S. share and lower than most other countries (chart 5).

Meanwhile, Canada’s relatively large concentration of small firms in output and employment is likely another contributor to the productivity gap. Firms of smaller scale tend to export and invest less than their larger  counterparts. Inefficient regulatory and tax policies are other factors cited as inhibitors to Canadian productivity and innovation.

Chart 4 shows Canadian and U.S. capital spending per worker. Capital spending per worker includes investments in nonresidential structures, machinery & equipment, and intellectual property. The series are indexed to Q1-2000=100. As of Q1-2023 the Canadian index value is 113 (or a 13% increase since Q1-2000) versus the U.S., whose index is at 162 (a 62% index). Canada's maximum value was 145 in Q4-2014 and minimum value of 92 in Q1-2002. Chart 5 compares research and development spending (as a % of GDP) for Canada and G7 economies 2001–2021. As of 2021, R&D spending in descending order is as follows: U.S. (3.5%), Japan (3.3%), Germany (3.1%), U.K. (2.9%), France (2.2%), Canada (1.7%) and Italy (1.5%). Since 2001, R&D spending as a % of GDP for all countries has been in the 1.0-3.5% range.

Capital Intensive Economies Are Better Off, But Slower to Recover

Regional trends in per-capita GDP are highlighted in charts 6 and 7.  Alberta, Saskatchewan, and Newfoundland & Labrador continue to record the highest levels of GDP per capita among the provinces owing to the high capital intensity of their key oil sectors. However, their status as leaders has been under some pressure since the oil price shock of 2014-15 and subsequent shift away from new, large-scale resource investment.   

Honing in on post-pandemic trends, British Columbia and Prince Edward Island are the only provinces that have managed to recover to their 2019 real GDP per capita levels. Nonetheless, these two provinces still sit below the national average (which, as noted earlier, has less than fully recovered from the pandemic).  

Chart 6 looks at Real GDP per capita levels across provinces in 2000 and 2022 and also plots the 2022 Canadian level ($55,340). In the year 2000 Alberta had the highest real GDP per capita ($72,791) while PEI had the lowest ($33,370). This is the same story in 2022 with Alberta having the highest at ($77,629) and PEI the lowest at (41,744). As of 2022, real GDP for Ontario ($54,552) is roughly in line with the national average. British Columbia's real GDP per capita is ($54,195) while Quebec's is modestly lower at ($47,738) Chart 7 compares real GDP of the provinces in 2023 compared to 2015 and 2019 levels. B.C.'s GDP per capita is 7.2% higher in 2023 vs. 2015, leading all provinces. Alberta's is down 4.5%, the lowest amongst provinces. Relative to 2019, B.C. and PEI are the only two provinces to recover their real GDP pr capita levels by 0.8% and 0.1%, respectively. Newfoundland's real GDP per capita is 7.2% lower than 2019 levels, the worst performing amongst provinces.

No Improvements for the Foreseeable Future

Chart 8 shows the quarterly forecast for real GDP and real GDP per capita until Q4-2025. We estimate real GDP in Q2-2023 to be 1.1% q/q annualized. From there, real GDP will slow to 0.2% q/q in Q1-2024 before rising to 1.9% by 2025. Over the forecast horizon, real GDP per capita is expected to be lowest in Q2-2024 (-1.7% q/q) and will start to see positive growth in Q1-2025. By Q4-2025, real GDP per capita is expected to grow by 0.5% q/q.

Unfortunately for Canadians, little turnaround in Canadian living standards appears to be on the horizon. Real GDP per capita has already contracted over the last three quarters and our most recent forecast points to persistent contractions until the end of 2024 (chart 8). In the coming quarters, the economy is expected to suffer a cyclical slowdown as ambitious federal immigration targets continue to prop up population flows. Canada is also one of the few advanced countries that has not recovered its pre-pandemic level of per capita GDP. Longer-term, the OECD projects that Canada will rank dead last amongst OECD members in real GDP per capita growth out 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.

Bottom Line

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