The global and Canadian economies are still adjusting to the shocks of COVID and war. Inflation remains elevated, and monetary conditions are restrictive. There are legacies, in particular high public and private debt.
Concurrently, the forces of demographic ageing, climate change, and digitalization are intensifying in a new fragmented world, transforming our economies, and requiring more public and private investment. These two factors—short-term adjustment and structural change—set the background for our 2024 Economic Outlook.
Near-Term Prospects
We project that global economic growth will slow to 2.6% in 2024, and rise modestly to 3% in 2025.
Under our prudent baseline scenario, the United States and Canada will both have low growth in 2024. We think that there is a good probability that the Bank of Canada (BoC) and the Federal Reserve (Fed) will begin easing monetary policy after mid-2024, supporting a recovery.
The U.S. economy will grow at an annual rate of about 2.0% from Q4 2024 to the end of 2025. Canada's economy, after slow growth in 2023, will grow faster, by about 2.9%, from Q3 2024 to the end of 2025.
At the end of 2025, inflation in both economies should be near target, and policy rates will be in the range of 3–3.5%, what may be the range for the "new" neutral rate for the Fed and the BoC for the medium term.
There are risks on both sides of our baseline scenario, but in an unstable world, they are somewhat more pronounced on the downside.
Structural Forces and the Challenge of Raising Standards of Living
Beyond this horizon, the interaction of structural forces is likely to create robust demand for investment, and continued upward pressure on costs, while lowering savings rates. This will keep nominal and real interest rates higher than pre- COVID levels. With geopolitical tensions, weak trade and a fragmentation of the global economy, medium-term growth prospects are modest.
For Canada, structural forces pose a formidable challenge. Governments and businesses have to work together to expand public and private investment, accelerate innovation, lift productivity growth and adapt the structure of our economy to sustain and raise per capita income.
Presently, we are not meeting this challenge. Our productivity growth has suffered chronically relative to the United States since the mid-1990s. Since Q1 2020, our GDP per capita has declined at an annual rate of 0.5%, against growth of 1.6% in the United States.
The investment share of our GDP must increase, with the consequence that the consumption share must fall. There can be no illusion that this will be easy since Canada must grow investment in both productive capacity and housing.
Households will have to raise their savings rate, governments exert fiscal discipline and allocate more of their revenue to investment, and businesses retain more of their earnings for reinvestment. In a world of low growth, this implies quite possibly a period of reduced consumption in absolute terms in the near term and no increase in perceived living standards. These are difficult messages for Canadians, ones not easily conveyed in today's political environment.
Orienting Our Business Strategies
To be on the winning side of economic transformation, and ultimately to survive and prosper, businesses have no choice but to invest in more, and more productive, physical capital and in the skilling and upskilling of their workers. They will also have to innovate and deploy the right mix of inputs, including technology and intangible assets, to raise total factor productivity.
At the heart of the transformation of the economy globally is technology.
Digital technology has permeated all parts of the economy. It is propelled further by generative artificial intelligence (AI). AI has immense potential to replace or supplement the work of humans, including highly skilled workers, and thus to be both a creative and disruptive force.
Technology is also shaping the paths and costs of the energy transition. If the pace of the transition is uncertain, what is certain is that technology will play a critical role in enabling reductions of emissions while preserving energy security, competitiveness and prosperity.
Competitiveness requires adopting new technology at pace—being a quick follower. Even more important, leadership requires developing new ideas, creating and owning valuable intellectual property (IP), and commercializing them successfully.
Yet, our businesses underinvest in innovation. As a proxy, total annual expenditures in research and development (R&D) of 1.6% of GDP for Canada pale against an OECD average of 2.7%. Canada also holds a disproportionately small share of IP rights globally.
Even in domains where Canada may claim or aspire to have an advantage, including energy and AI, it is struggling to punch at its weight, let alone above it, in the global contest for technology leadership.
As digitalization and the energy transition transform the economy, there is an opportunity for our businesses to gain a stronger foothold in global value chains.
Despite an ever-changing and complex set of global rules, sanctions, regulations, and environmental, social and governance (ESG) standards, it is essential that our businesses pursue export opportunities.
Global trade is still growing, and with the right investments, our economy and our firms can build on strengths to sustain, diversify and expand trade. We can also leverage foreign investment.
Through the energy transition, Canada can capitalize on its capacity to be a reliable exporter of responsibly sourced hydrocarbons and over time pivot to export more clean energy commodities, minerals, technologies and services.
It can build on its world-class human capital, institutions and vibrant ecosystem of digital enterprises to monetize, through global trade, the value of digital innovation and services, including AI and its applications.
With the right investments in infrastructure, our agri-food sector can also draw on natural advantages, know-how and technology to add value and grow exports in markets seeking quality, safety and security of supply.
Orienting Our Policy Frameworks
The priority for monetary policy is to bring inflation back to target and keep it there. That is the best way to keep interest rates as low as possible and to support investment and economic adjustment. Given high public and private debt, low inflation is also important for financial stability.
Fiscal policy has to work in tandem with monetary policy by constraining spending on current services and transfers. It has to set out a credible short- and medium-term track, with a solid fiscal anchor. Governments should aim to keep public debt charges below 10% of their revenue. In the federal Fall Economic Statement, that "rule" is breached starting in 2023-24.
Governments have to be honest with Canadians that they cannot deliver greater or improved services today without raising taxes. Moreover, they have to allocate a greater proportion of their revenue to public investment that can grow our economic potential.
Structural policy—the laws, regulations and actions that shape the business environment— must be focused on investment, innovation, and productivity growth. Policy frameworks developed in prior decades have to be adapted to today's economy. And initiatives that have proven ill judged and that deter adjustment and investment should be corrected.
We set out five priorities: immigration, competition, taxation, frameworks for the digital economy and environmental regulation.
Immigration is now the source of almost all net growth in the labour force. We need to realign policy and programs, using them less as a stopgap to address immediate worker shortages and more as a source of highly skilled, productive workers. Competition is the strongest incentive for innovation and productivity growth. We need more of it. Some recent and proposed amendments to the Competition Act may be helpful. Principally, the solution lies in trade and marketplace frameworks that keep markets open and contestable.
Tax structure matters. Incentives to work, save and invest can be strengthened, with greater reliance placed on consumption taxes. It may also be appropriate to rebalance the tax and transfer system to provide fewer advantages for retired Canadians and more for workers.
We have to move faster in adapting our business frameworks for a data economy. Our laws, regulations, standards and codes must be modernized to stimulate innovation while safeguarding consumer confidence and trust, privacy and cybersecurity. We are not keeping up.
The energy transition will require sustained, massive investment in new energy infrastructure over the next 20 to 30 years. Critical requirements are a regulatory environment and fiscal instruments that are predictable and competitive. Many matters require timely resolution.
Bottom Line
These are not easy times. We have yet to recover fully from the shocks of COVID and war. The world is uncertain. The U.S. presidential election in 2024 is a wild card. Structural change will test our economy in profound ways while presenting new opportunities.
Navigating these waters and safeguarding our prosperity require collective effort, including government and business collaboration. Our shared responsibility is to raise investment and innovation, lift productivity growth, adapt the structure of our economy and raise per capita income.
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