OECD Economic Surveys, Canada, June 2014

Last Updated on January 24, 2019

Canada’s economic expansion has strengthened in the second half of 2013, with growth rising to 2.8% on average, after a soft patch that began in late 2011. This acceleration has largely been led by private consumption, underpinned by income and wealth gains. Exports are now close to their 2007 cyclical peak but are well below levels that might be expected at this stage of the recovery, with non-commodity exports being particularly weak. This weakness is partly due to the hesitant global economic expansion, notably in the United States, but is also due to a loss of international competitiveness.

The recent weakness in business investment follows strong growth coming out of the recession, when investment levels rebounded even more strongly than in the United States, the only other G7 country where full recovery has occurred. The gains reflect increases in both non-residential construction and machinery and equipment investment and are at least in part attributable to several government actions since 2006, such as lowering the corporate tax rate. The Bank of Canada has held the policy rate at 1% since September 2010. Business credit is growing faster than its historical average, but household credit growth has been tepid, in line with deleveraging.

Given the current low underlying inflation rate, uncertainty surrounding the amount of economic slack and signs of housing-market stabilisation, banks should maintain their supportive policy stance for the time being. But as slack diminishes, headwinds dissipate and inflation pressures rise, monetary accommodation will need to be progressively withdrawn to stabilise inflation around 2%. Earlier tightening would have desirable household deleveraging effects but would be likely to lead to undershooting of the inflation target.

Annual real GDP growth is projected to increase to 2.7% in 2015 – somewhat above potential rates of about 2%. Non-commodity exports should be supported by the recent currency depreciation and stronger foreign market growth, notably in the United States, which takes 60% of Canadian exports (on a value-added basis). Energy exports are also likely to pick up, reflecting announced expansion plans, the growing use of Canadian heavy oil in US refineries and further growth in rail capacity. As uncertainty surrounding the global economic outlook diminishes, non-financial firms are well placed to increase investment to boost capacity and cost competitiveness, given their large cash buffers and supportive financial conditions. Consumption growth is likely to remain solid, while housing investment should fall. With economic slack absorbed, underlying inflation is projected to rise to near 2% by late 2015.

The main upside risk to the economic outlook is that US investment growth rebounds with unexpected vigour due to healthy corporate balance sheets. One of the main risks is that non-commodity exports take longer to recover than projected owing to weak competitiveness and reduced production capacity in some export sectors. Another is that the global economy may not recover as projected. Low borrowing costs and loosening credit restrictions over the mid-2000s made it easier for homeowners to carry larger mortgages, driving household debt to a historical high of 166% of disposable income. Easier credit over this period partly reflected growing mortgage securitisation by the Canada Mortgage and Housing Corporation (CMHC), which is wholly owned by the federal government.

Furthermore, government-backed insurance was extended to a wider range of what are often labelled “non-prime” mortgage products, including interest-only and 40-year mortgages, plus loans to the self-employed requiring little income documentation. To contain housing-related risks, the federal government has tightened mortgage-insurance regulations since 2008. It cut the maximum amortisation period on insured mortgages to 25 years and imposed a minimum 5% down payment. Widespread government-backed mortgage insurance has allowed the government to maintain control over underwriting standards and helped limit the growth in subprime lending.

Even though the CMHC began insuring certain types of Canadian “non-prime” mortgages over 2004-07, it generally imposed higher minimum credit scores on such borrowers. Most subprime loans were not eligible for government-backed insurance, and they therefore expanded only to an estimated 5% of the pre-crisis market, compared with 22% in the United States. As a result, the quality of insured mortgage originations remained steady throughout the boom, and it has improved since the crisis as banks pared risk exposure. Also, whereas much of the growth in US mortgage debt went to new low-income homebuyers, in Canada most reflected net refinancing by existing owners taking on longer or larger mortgages.

Canadians enjoy high levels of well-being and social progress according to the OECD’s Better Life Index. All of Canada’s component scores exceed the OECD average, with particularly high outcomes in safety, health and housing. Its overall score ranks more favourably (3rd) than does its GDP per capita in PPP terms (11th), underlining the importance of considering other measures of well-being than income.

However, disposable income inequality has increased by considerably more in Canada since 1995 (11%) than in other countries with data (2%) to a level that is now 12th highest in the OECD. Yet, this increase occurred entirely in the late 1990s. It reflects both higher market income inequality and a lower share that is offset by the tax/transfer system. The decline in the role of transfers in the late 1990s reflects improved economic conditions. When comparing across similar years in the business cycle, the effectiveness of Canada’s tax and transfer system has remained largely unchanged over the last three decades.

Overall, Canadian residents generally enjoy good quality and affordable housing: the share of household income spent on shelter costs is close to the OECD average, and a higher-than-average 90% are satisfied with their current dwelling conditions. However, rising house prices have worsened affordability disproportionately for renters, who tend to have lower incomes than homeowners. Multi-unit housing construction has increasingly favoured condominiums over purpose-built rental buildings over the past decade. Although a significant share of condominiums in major cities is rented out, they typically have higher rents and represent a less stable housing supply for tenants. Policies such as allowing homeowners to rent out secondary suites have raised densities and the supply of lower-cost accommodation in cities like Vancouver, and such measures should be encouraged more broadly. As urban cores reach their densification capacity, planning efforts should be directed towards improving employment densities and suburban public transit connectivity. 

Earnings premiums suggest generalised shortages of post-secondary education (PSE) skills have not developed in recent years. Earnings premiums for people with PSE over those with only a high-school diploma have been broadly stable since 1997, reflecting a small increase in the premium for a post-secondary certificate/diploma and a small decrease for a university degree. Nevertheless, pressures might still exist in specific fields of study. In fact, university-degree premiums increased substantially between 1995 and 2005 for Canadian-born workers, especially in engineering, management and health care. By contrast, the corresponding earnings premiums for immigrants were stable or declined and remained much lower than for the native born, indicating that their qualifications and foreign work experience do not have the same value in the labour market. With the change in immigrant source countries since the early 1990s, foreign qualifications increasingly are not equivalent to Canadian qualifications, and immigrants often do not have adequate skills in English or French to perform well in highly skilled roles.

However, this earnings gap diminishes markedly over time since arrival as immigrants improve their official-language skills, gain Canadian work experience and become qualified to local standards. Skills shortages also have also an important regional dimension. Ontario and the Atlantic provinces have had the largest rises in earnings premiums at the post-secondary certificate/diploma level and the smallest declines at the university degree level.

However, it is wage differences, not differential skills premiums that matter for interprovincial migration. Real earnings have risen more in the Prairie provinces than elsewhere at all education levels, boosting mobility incentives across the board. The earnings increases were greatest at the post-secondary certificate/diploma and high-school graduate levels, suggesting that labour shortages were most intense there.

Labour-market information (LMI) can help to reduce skills shortages by facilitating job matching and informing education decisions. Employment and Social Development Canada’s new website providing easily accessible information linking fields of study to occupational outcomes will improve LMI. Moreover, Statistics Canada began to publish job-vacancy data in 2011, although this would be more effective if they were more occupation and economic-region specific. For human-capital investment decisions a major need is better career counselling, which can be very cost effective for directing students into the best courses, which in some cases may be in colleges or by apprenticeships rather than university courses. Strong basic literacy and numeracy skills help people to acquire qualifications.

While Canadian 15 year-olds score well in the PISA studies, average adult literacy and numeracy scores for the 16-24 age group are less impressive. Upper secondary education should therefore place greater emphasis on developing these skills, perhaps by requiring students to study mathematics and English/French until school completion, and post-secondary institutions should consider investing more in remedial education. For youths to be able to enter fields in high demand post-secondary institutions need to make the necessary places available. These places are likely to be more expensive if they are in science/technology/engineering/mathematics (STEM) fields than elsewhere.

Universities would need larger budgets to adapt the places they make available to such a shift in demand. Many employers would also like to see graduates with better soft skills, such as communications and teamwork (Canadian Council of Chief Executives, 2014). As recommended in the 2012 Survey, increasing the weight of practice-intensive programmes would be effective for developing creativity, teamwork and leadership skills. Experiential learning (such as co-op placements) during university education has proven to be highly effective in developing the soft skills valued by employers.

The new Canada Job Grant is intended to orient public training expenditures towards meeting labour market demand, which would improve job matching. It will enable employers to participate in decisions about who gets training and what type of training, to ensure that training is better aligned with job opportunities. Two-thirds of the costs will be paid by governments, with the remainder cost-shared by employers. Provincial/territorial governments have some flexibility as to how the government contribution is funded, be it from the new Canada Job Fund Agreements, the Labour Market Development Agreements or other provincial/territorial own-source revenues.

As part of implementation, the Canada Job Grant will be reviewed in the second year to allow time to make adjustments as necessary to ensure that it is meeting the needs of employers and jobseekers.

Strong demand for tradespersons and an expansion of trades covered by the Red Seal programme (which harmonises trade certification regimes by developing common provincial standards, but is primarily focused on certification and not apprenticeship  supply assessments of their education credentials and proficiency in English or French.

Canada’s economic immigration programmes do not sufficiently prioritise applicants according to labour-market needs. To overcome this shortcoming, in 2015 the federal government will introduce the “Express Entry System”, based on an “Expression of Interest” model, which will establish a pool of qualified potential immigrants from which governments and employers may consider candidates based on their immigration and labour market needs.

 

Attorney Colin Singer Commentary:

The Express Entry System is a variation of a match making service used by many dating agencies.  It seems ironic that the Department of Citizenship is now undertaking to become an employment match maker when it has demonstrated its repeated inability to process immigration applications within service standards that it has set as required to remain competitive in this global migration industry.  

Source: OECD