Juno News - September 16, 2023


The alarming state of Canada’s economic situation


Episode Stats

Length

22 minutes

Words per Minute

179.68262

Word Count

4,031

Sentence Count

203

Misogynist Sentences

1

Hate Speech Sentences

1


Summary


Transcript

00:00:00.000 Hello, everyone, and welcome to the Rupa Subramania show. I'm Rupa Subramania. Today, we're taking
00:00:21.860 a closer look at Canada's alarming economic situation. Despite a partial bounce back since
00:00:29.320 the pandemic, the standard of living in Canada seems to be stuck in the mud. The data show that
00:00:34.160 GDP per capita, that is what an average Canadian makes in a year, is no higher than it was back in
00:00:40.160 2018 after taking a big hit during the pandemic because of lockdowns and supply chain disruptions.
00:00:47.380 A recent Statistics Canada report exposes this unsettling reality, and it's an issue that should
00:00:54.240 concern as all. Now, let's take a look at the data. Canada's economy contracted by 0.2% in the
00:01:01.740 second quarter following a decline from 3.1% to 2.6% in the first quarter. This is at a time when
00:01:10.480 the U.S. economy is growing by leaps and bounds. One major culprit in all of this is the struggling
00:01:16.980 housing market, with investment down by 2.1% and new construction plummeting by 8.2%. Even renovation
00:01:26.360 spending took a 4.3% hit. Now, turning to the Bank of Canada, interest rates raised by the Bank of
00:01:33.860 Canada to combat inflation have led to higher borrowing costs, predictably so, and a drop in
00:01:41.300 household spending, with real household spending growth slipping from 1.2% to a mere 0.1%. Canadian
00:01:50.400 households are now the most indebted in the advanced world, storing up trouble for the future. Sluggish
00:01:57.120 exports, which increased by just 0.1% in the second quarter compared to 2.5% in the first quarter,
00:02:05.780 further compound the issue. Though there's a slight glimmer of hope in business investment,
00:02:11.680 especially in non-residential structures, it's overshadowed by declines in various other sectors,
00:02:18.020 including the services and goods-producing industries. And if that's not enough, this
00:02:24.060 economic report coincides with the Bank of Canada's pivotal decision on interest rates. They've opted to
00:02:29.900 leave rates unchanged for now, but remain vigilant due to concerns about rising inflation.
00:02:35.160 Especially driven by increasing fuel costs, partly as a result of the ongoing conflict in Ukraine.
00:02:42.260 Now, inflation is already surging, with Canada's annual rate hitting 3.3% in July, up from 2.8%
00:02:49.640 in June. All of this takes place against the backdrop of a slowing Canadian economy, as consumers cut
00:02:56.560 back on credit spending and the housing market continues to cool. And what's the impact on everyday
00:03:02.460 Canadians? The Bank of Canada's policy rate directly affects borrowing costs for Canadian lenders,
00:03:08.720 impacting everything from mortgages to loans to the interest we pay on credit card debt. This marks the
00:03:16.180 third pause on interest rates this year after consecutive rate hikes in June and July. The Bank of Canada
00:03:23.060 predicts inflation will eventually settle at 2% by 2025. Some experts, like the Bank of Montreal's chief
00:03:31.520 economist Doug Porter, believe that the bank may be done with rate hikes, anticipating that inflation
00:03:37.520 will rise to about 4% by the end of the year, but ultimately settle at the 2% target. But others believe
00:03:44.620 more rate hikes may be in the works if inflation remains stubbornly high. For Canadian homeowners,
00:03:51.620 the rate pause means no steeper mortgage rates for now, which comes as a great source of relief.
00:03:59.060 But renewals will bring higher borrowing costs and larger monthly payments. Some Canadians,
00:04:05.420 unfortunately, may no longer be able to afford the homes that they're currently living in
00:04:10.320 when they have to renegotiate their mortgages at much higher rates. As Canada grapples with these
00:04:15.960 economic challenges, I wanted to speak to someone with the expertise to comment on what's going on
00:04:21.020 now and where we're heading. I'm delighted to have Jake Fuss with me as a guest today. He is Director of
00:04:28.620 Fiscal Studies at the Vancouver-based think tank, the Fraser Institute. He holds degrees in Commerce and
00:04:34.620 Public Policy from the University of Calgary and has written op-eds in major Canadian newspapers such as
00:04:41.100 the Globe and Mail and the National Post. Jake, thank you for joining us today. To start, based on the
00:04:47.340 recent data that showed our economy has actually contracted, at a time when the U.S. keeps surging
00:04:54.960 ahead, could you give us your perspective on the economic contraction that's currently underway and what
00:05:02.680 you see are the primary drivers of this downturn? Yeah, no, I think it's a great question. I mean,
00:05:09.280 ultimately, what we've seen over the last few years in Canada in particular is really a stagnant economy.
00:05:15.080 So one of the things that we've been tracking is looking at GDP per capita, for instance, which is
00:05:19.100 kind of a broad measure of living standards for Canadians. It's kind of a rough measure of income
00:05:23.160 per person. And what we've seen is that GDP per capita, although it's recovered somewhat from COVID,
00:05:29.140 it actually hasn't recovered all the way to what it was before the pandemic. So that's one of the main
00:05:34.640 concerns right now for Canada is that we're starting to fall behind the United States and other OECD
00:05:39.200 countries, which are advanced economies. And then at the same time, you know, we're also falling behind
00:05:44.740 in things like business investment per worker. The United States is really trending up in terms of
00:05:50.240 business investment, whereas Canada has kind of gone in the opposite direction. Over the last seven or eight
00:05:54.960 years, in particular, we've actually seen a decline in business investment. And this is really important
00:05:59.520 for job creation, innovation, growing incomes for Canadians as well. So right now, we've kind of seen
00:06:05.500 this, you know, gap between Canada and the United States on several different factors. We're starting
00:06:10.400 to fall behind a lot of these advanced countries.
00:06:13.620 Yeah, we'll get to the business investment. I think there was a Fraser Institute study or major report
00:06:20.200 that came out recently talking about precisely that. We'll get to that in a bit. But I want to ask
00:06:26.580 you about the housing market. Just about every analyst out there has pointed to the housing market
00:06:34.100 as being a major source of concern with declining investment in construction. What are your insights
00:06:42.400 into the challenges facing the housing sector? And what do you think needs to happen? What policies or
00:06:49.100 actions do you believe could help stabilize it?
00:06:53.040 Yeah, I mean, it's a great question, because ultimately, this is a very complex issue. And
00:06:56.380 it's one that affects a lot of Canadians, particularly in Vancouver and Toronto, which is where the
00:07:01.140 majority of the housing concerns really are right now. You know, I think there's a few issues,
00:07:06.380 particularly on the housing side. And the hard part is that there's three levels of government
00:07:12.200 really involved here. We have the municipal governments that are in charge of zoning laws and permit
00:07:17.560 at times and things like that. The provinces also have a role to play in terms of that as well. And
00:07:23.640 then you have the federal government was less of a role in housing, but they're also trying to take on
00:07:29.000 more initiative and other things like building more affordable housing too. So there's a lot of
00:07:34.200 challenges. One of the main ones right now, though, is that we have our population growing much faster
00:07:39.000 than we're able to keep up with in terms of construction. So if we actually look at some of the data,
00:07:44.200 what we're seeing is that we're actually building roughly the same number or even less homes than we
00:07:48.280 used to in the 1980s or 1970s. And that's with higher population growth nowadays too.
00:07:54.680 So, you know, we're really facing a lot of challenges there right now. Supply is not keeping
00:07:59.400 up with demand, which is one of the main factors. So ultimately, the solution is actually to build more
00:08:04.440 housing of all different types, not just single detached homes, but you also want more row homes,
00:08:09.720 you want more apartment buildings, condos, all of these different types of homes, fourplexes, duplexes.
00:08:15.560 But one of the big impediments right now is actually government itself. So one of the things that you
00:08:20.360 need to do is kind of get government out of the way, particularly at the municipal and provincial
00:08:24.600 level. There's a lot of restrictions on zoning in particular. So for a long time, a large majority
00:08:30.600 of Toronto, for instance, was only zoned for single detached homes. That needs to change over time,
00:08:36.360 because you need to get densify what is being built for homes over time. So really, it is about
00:08:42.600 getting government out of the way in increasing, you know, permit times are so we get these homes
00:08:47.800 built faster, and there's not delays in the process. Because right now, we're really falling
00:08:52.200 behind. And all these reports show, you know, we need millions of new homes over the next 10 years.
00:08:56.840 And ultimately, you know, the gap is kind of growing between how fast the population is growing
00:09:01.480 versus how fast construction is actually growing. So there's lots of concerns. And there's lots of ways that
00:09:06.120 governments can actually address that. But sometimes it's just getting out of the way,
00:09:09.960 so that the private sector can actually take take effect in the house.
00:09:13.960 Yeah, no, absolutely. I completely agree with you. And, and, you know, but some analysts believe
00:09:20.680 there's a there's a housing bubble in Canada that's been fueled by the by all of the liquidity that was
00:09:27.880 pumped into the economy during the period of low interest rates and quantitative easing.
00:09:32.200 Should that be a worry? Could we have something as dramatic as the 2008 global financial crisis
00:09:42.360 sparked by the collapse of the US subprime housing market here in Canada?
00:09:47.560 I mean, it's a good question. It's difficult to say, because there's just so many factors that go on,
00:09:51.800 you know, whether something is a housing bubble or not. But you know, I think ultimately, the concern and
00:09:57.640 what Canadian government should actually focus on is about actually just increasing that supply.
00:10:03.000 You know, whether or not there's a housing bubble is kind of, you know, beyond what we can understand
00:10:07.400 right now. But I think ultimately, it's about, you know, Canadian governments, obviously, they're
00:10:11.320 starting to understand that this is a big challenge, especially with, you know, the increase in prices
00:10:15.800 during COVID. And then now we're even seeing other, you know, markets like Calgary and some of the other
00:10:21.320 markets too, that are seeing population growth faster than they have in the past. And now they're
00:10:26.360 starting to see housing prices increase quite rapidly as well. So I think ultimately for Canadian
00:10:31.400 governments, it's just going to be about addressing the supply issue. And like I said, getting out of
00:10:35.720 the way so that you can actually get these constructions going. Because the longer and longer
00:10:40.200 we wait to actually address this issue, it's only going to get worse over time. And with interest rates
00:10:44.920 so high right now too, that also means people are going to the rental markets where you have low vacancy
00:10:49.240 rates there too. And so ultimately, you know, now you have concerns on rental side and housing side. So
00:10:55.800 moving forward, the way to address this is simply to increase the supply of housing, because that issue
00:11:01.320 is not going away anytime soon. Let's talk about inflation. Inflation, as reported by Stats Canada,
00:11:09.640 has been on the rise, I believe hitting 3.3% in July. This is well above the Bank of Canada's target.
00:11:16.760 How do you think this is affecting the average Canadian's purchasing power and overall economic
00:11:22.920 well-being? And, you know, what should families and individuals be mindful of in this inflationary
00:11:29.160 environment? Yeah, it's a great question. I mean, ultimately, you know, the Bank of Canada recently
00:11:34.680 held the interest rate at 5% because of, you know, what we're seeing with inflation kind of remaining
00:11:40.520 rampant throughout Canada right now. You know, obviously, we've seen, you know, the effect on
00:11:45.880 food prices for Canadians over the last number of years. So that's certainly a concern. And then you
00:11:50.680 also have, you know, rising mortgage costs right now as you have those interest rates, you know,
00:11:55.880 staying at a high level too. So that's certainly, you know, affecting the pocketbooks of Canadians.
00:12:01.000 And another factor that we've also looked at is that tax rates or taxes overall are actually
00:12:06.040 increasing for Canadian families too. And they actually constitute a higher percentage of your
00:12:10.600 income than actual basic necessities like food, clothing and housing combined. So that's, you know,
00:12:16.600 that's certainly a major concern for Canadian families right now, because we are seeing, you know,
00:12:21.640 these rising prices for a whole bunch of different goods over time. So that's a major concern, you know,
00:12:27.640 especially if you have inflation over 3%. Generally, the bandwidth we want is around 2% inflation.
00:12:33.800 That's generally thought to be kind of the area where inflation should be. So the Bank of Canada
00:12:38.200 does have its, you know, work cut out for it over the next, you know, year or two here,
00:12:42.440 trying to get that inflation back down to that 2%. And there's a lot of different factors at play,
00:12:47.160 because you're also having, you know, the economy slowing down at the same time. But we're starting to
00:12:51.880 see, you know, some signs like we saw in the Q2 of this year in the second quarter, but the economy
00:12:58.280 is starting to contract a little bit. So it remains to be seen what exactly is going to happen
00:13:04.120 with inflation. But, you know, we're certainly hopeful it's going to come back down to that 2%
00:13:08.520 so that Canadians can get a little bit of a break in terms of their wallets there.
00:13:13.480 Yeah, I mean, speaking about the Bank of Canada and interest rates, there's been some debate about
00:13:19.240 the future direction of rates. The Bank of Canada stated that they will leave rates unchanged for
00:13:25.880 now. They've also stated that they're prepared to increase the policy interest rate further if
00:13:32.440 needed. Do you think it's time for the Bank to stop its cycle of rate increases or do you think
00:13:38.920 more rate hikes could be warranted down the road? I mean, it remains to be seen ultimately what's
00:13:44.280 going to happen. I mean, I think the Bank of Canada is going to have to pay attention to what's happening
00:13:48.680 with inflation. Stats Canada has monthly data on inflation, but it also has to keep its eye on
00:13:55.800 what's happening in the economy more broadly as well. So looking at things like unemployment rate,
00:14:00.600 over time, economic growth. So there's a whole bunch of different factors that go into their
00:14:04.760 decision beyond just inflation itself. So it's certainly going to be a difficult, you know,
00:14:10.520 kind of course to map out over the next little while here. But ultimately, you know, the Bank of
00:14:15.000 Canada is generally focused on that inflation. That's generally what their target is, just keeping
00:14:20.840 it at 2%. So I think they're going to be laser focused on that for the next number of months here.
00:14:26.360 But it's certainly going to be interesting to see what happens with Canada, whether we're going to
00:14:29.720 continue to kind of slow down in terms of economic growth or what's going to happen there. But there's
00:14:35.960 a whole host of different complex factors at play here. Yeah, I want to finally come to this question,
00:14:43.160 final question for you. It's a report written by your colleagues at the Fraser Institute. And they
00:14:49.000 came up with this very striking finding that the bulk of job creation in Canada in the last few years
00:14:54.200 has actually been in the public sector rather than the private sector.
00:14:57.080 This kind of reminds me of socialist economies, where a large part of the workforces in the public
00:15:03.240 sector and productivity and innovation are very low, as is happening right now here in Canada.
00:15:10.360 Would it be fair to say that Canada under Trudeau has become more socialized,
00:15:15.320 especially given the huge fiscal stimulus during the pandemic?
00:15:19.400 Well, what we've seen really, you know, especially under the last eight years or so with the federal
00:15:25.000 government, we've seen this increasing size of government. So the government playing more of a
00:15:29.400 role in the economy, you know, increasing the size of the public sector as well. So that's been a major
00:15:35.080 factor at play. So, you know, the study that you referenced from my colleagues, for instance,
00:15:39.000 shows that nationally in Canada, you know, public sector job growth has been about 12% since the beginning of
00:15:45.000 the pandemic. And then in the private sector, it's been about just over 3%. So there's a stark difference
00:15:51.160 in terms of, you know, where we're actually putting our resources in the economy right now, it's a lot
00:15:55.400 of it is going into the public sector jobs. And we're not seeing that same private sector job growth.
00:16:00.520 But this has really been the trend in all provinces right now, too. We're seeing it in all 10 provinces,
00:16:05.320 public sector job growth since the beginning of the pandemic has actually increased faster than private
00:16:10.120 sector job growth. And another consideration that we have here, too. Right now, there is also a gap
00:16:16.600 in terms of pay between public sector workers versus private sector workers that are comparable to
00:16:21.960 so we see almost a 9% gap between comparable workers. So public sector workers generally enjoy
00:16:27.800 higher pay for the same type of work or same type of experience as well. So that's another thing at play
00:16:34.680 here. But ultimately, you know, we have seen this really increasing size of government. And it's also
00:16:40.040 happened at the provincial level to really, regardless of political party, we've actually
00:16:44.920 seen, you know, size of government start to increase governments thinking that they can play
00:16:49.320 more and more of a role in the economy, especially with COVID that kind of gave, you know, a little bit
00:16:53.800 of an excuse for governments to start to jump in and play more of a role. But we've especially seen
00:16:58.440 that at the federal level, really, since 2015, in particular, we've seen that increase government
00:17:03.400 spending them, you know, subsidizing more factors in the economy. So it's, it's certainly, you know,
00:17:08.600 trending that direction where the government has more of a role to play or sees itself as having
00:17:13.240 more of a role to play in the economy. Well, you know, the Trudeau government
00:17:18.840 increased spending massively during the pandemic, but didn't cut our taxes. Do you think this was a
00:17:24.840 mistake? Should the stimulus have been delivered through tax cuts that stimulate the private sector
00:17:30.520 rather than doling out government cash to, to all and sundry? Yeah, so one of the things that we saw,
00:17:36.520 especially with all the spending that was done during COVID, there was a lot of waste, and there
00:17:39.960 was a lot of inefficient targeting and who that spending was actually going to. So myself and one
00:17:45.080 of my colleagues looked at some of the wasteful spending that was done during COVID, what we found
00:17:49.720 is roughly 25% of the money that the federal government was spending was really wasted during
00:17:54.280 COVID. So, you know, programs like the Canada Emergency Wage Subsidy, Canada Emergency Response Benefit,
00:18:00.280 a lot of the money, you know, in these different programs, you know, their goal was to try to get the money out the
00:18:05.480 door fast. But they ended up giving it to people who maybe weren't in genuine need living in higher
00:18:10.600 income households, or, you know, spouses of people that were higher income in particular. So we saw a
00:18:16.760 lot of this wasteful spending too, we saw reports from Auditor General, for instance, pointing that a
00:18:21.480 lot of the money from some of these subsidies or other response benefits went to people who shouldn't
00:18:27.720 have even been eligible in the first place for some of these programs. So we saw a lot of problems with
00:18:32.920 a lot of the spending that was going on during COVID. But this has been a trend even before COVID.
00:18:37.640 You know, we saw that Justin Trudeau had actually been, had recorded the highest year of spent per
00:18:43.160 person spending in Canadian history in 2018 and 2019. And that's really continued throughout the
00:18:49.080 pandemic and even after the pandemic. So even when we exclude COVID related spending during 2020 and 2021,
00:18:55.960 we are still at record levels of per person spending in Canadian history. And then on the other side,
00:19:00.840 you know, we haven't really had much progress on taxes. You know, we haven't really seen,
00:19:05.640 we've actually seen the taxes increase for Canadian families over time. So the average Canadian
00:19:10.760 family is now spending about 46% of its income on taxes each year. And that's only really increased
00:19:17.080 over the last number of years, it hasn't gone down. So you know, the effects of that 2016 tax rate
00:19:23.560 reduction for that middle class tax rate cut that the federal government called, they've reduced that one
00:19:29.080 from 22 to 20.5% hasn't really actually decreased taxes over time, because they eliminated a number
00:19:35.160 of tax credits at the same time. And we've seen a number of other taxes increase over time too.
00:19:40.840 So that's another consideration too, we really haven't seen much progress on tax reductions for families.
00:19:45.720 So, I know, I said three questions earlier that that was going to be my final question. But
00:19:53.240 this will be my final question for you. How worried are you about the state of the economy?
00:19:59.240 You know, you think that the the our policymakers understand what's going on here?
00:20:04.840 Is there any recognition of the problems and how they're going to go about fixing it?
00:20:09.000 Well, I think, you know, part of the problem is that, you know, sometimes, you know, politicians
00:20:13.800 appear to, you know, recognize the problems, you know, regardless of whether it's the federal,
00:20:18.120 provincial, municipal level of government, and different political parties as well. But really,
00:20:23.240 the main challenges is what we already know, you know, we face weak economic growth prospects for the
00:20:29.240 next number of years. The OECD Organization of Economic Cooperation and Development, they recently
00:20:35.560 released a report within the last few years, which shows Canada is likely going to have the worst
00:20:41.000 GDP per capita growth over the next 10 years, and then they even show up to 2060, we're probably gonna
00:20:46.520 have the weakest economic growth of all these advanced economies. So that's certainly, you know,
00:20:51.240 a big concern, you know, Canada's productivity, innovation, all of these things are starting to
00:20:55.640 fall behind a lot of other countries, like we touched upon in some earlier questions. You know,
00:21:00.040 Canada really faces these weaker economic growth prospects, and there's going to be countries that
00:21:04.520 surpass us that aren't as doing as well as us right now, but in the next 30, 40 years are start
00:21:09.800 are going to start to surpass us and even exceed us. You know, we're certainly falling behind the
00:21:14.680 United States in a number of different categories too. With that business investment dropping over
00:21:19.720 time in Canada, that's not good for incomes or job creation for Canadians. So ultimately,
00:21:25.080 unfortunately, there are a lot of, you know, headwinds in the near future and over the long term.
00:21:30.600 But this doesn't need to be set in stone. You know, we can be optimistic about the future
00:21:35.240 if governments start to change the course correction and start to fix a lot of the issues
00:21:38.920 in the economy. So I think that gives some some reason for optimism if governments start to recognize
00:21:44.200 these problems and actually put plans into action that change that course, that we could be in a much
00:21:49.080 better position. But unfortunately, right now, the direction we're headed is, you know, certainly we're
00:21:55.240 going to have face some some headwinds in the near future. Well, Jake, there's so much more we could
00:22:01.480 talk about. But I want to thank you for your insights for sharing your insights with us. And
00:22:05.800 I would love to have you back on again in the near future. Thanks very much for having me on. It was a
00:22:12.200 nice night before we get started.
00:22:13.160 Thank you,