Key Takeaways
- Canada’s long‑run growth depends on expanding the labour force or raising productivity; it is currently failing on both fronts.
- A decade of weak productivity has been hidden by rapid population growth driven by immigration, which is now reversing.
- Labour productivity in the business sector fell 0.5 % in Q1 2024, marking two consecutive quarterly declines.
- Canada’s output per hour worked is now roughly 30 % below the U.S. level, a gap that has widened from 20 % in 2000.
- Low business investment—especially in machinery, equipment, and R&D—combined with rising U.S. protectionism, is the core driver of the productivity shortfall.
Canada’s Dual Growth Engines Stalled
For the past ten years Canada’s economy has been “flying with one engine down.” The first engine—labour‑force expansion—was kept aloft by a surge in immigration and temporary foreign workers. The second engine—productivity growth—has been sputtering for much longer. When immigration began to taper, the hidden weakness in productivity became impossible to ignore, leaving the economy in a torturous transition period while policymakers wait for one of the engines to whir back to life.
Productivity Lag and Population Mask
Economists agree that long‑term growth can arise from either more workers or more output per worker. Canada has historically been a laggard on the productivity file, and the problem has worsened over the last decade. Booming population growth, largely fuelled by immigration, masked the shortfall at the aggregate level, creating an illusion of economic health even as output per hour worked stagnated.
Immigration Curbs End the Quick Fix
The recent course correction on immigration—intended to reverse pandemic‑era policies that brought in record numbers of temporary foreign workers and international students—has removed that masking effect. With immigration now restricted until at least the end of 2027, population growth is expected to hover near zero for the next couple of years. Consequently, Canada has lost both drivers of long‑term growth, and GDP expansion has flatlined; Bloomberg’s consensus forecast calls for just 0.7 % growth in 2026.
Recent Productivity Declines and Population Shrinkage
Statistics Canada reported that business‑sector labour productivity fell 0.5 % in the first quarter of 2024, the second straight quarterly decline. Senior BMO economist Sal Guatieri called the figure “very disappointing” and warned that a sustained upturn is needed to safeguard long‑term prospects. Adding to the pressure, Canada’s population is now shrinking for the first time on record, turning the next two years into a stress test of whether the economy can function without the crutch of heavy immigration.
Policy Shifts and Trade Tensions
The hostility of the Trump administration toward North American free trade has forced Canada to rethink its economic model. The renewed focus on self‑reliance presents an opportunity to finally address the long‑neglected productivity gap. However, the same protectionist climate that prompted the policy shift also makes it harder to stimulate the investment needed for productivity gains, creating a dilemma for policymakers and business leaders alike.
Investment Shortfalls and R&D Gap
At the heart of Canada’s productivity problem is a chronic lack of business investment. Investment in machinery and equipment, for example, is about 20 % lower per worker today than it was a decade ago. Canada also lags its peers in research and development spending, a shortfall that is especially troubling as the world undergoes another wave of innovation—driven by artificial intelligence—that could reshape productivity much as the internet did in the 1990s. Desjardins estimates that AI‑related spending accounted for roughly 30 % of U.S. real GDP growth last year, but only 5 % in Canada.
Impact of US Protectionism
Since 2016, employment growth in Canadian industries that serve U.S. consumers has plateaued at just 2.8 %, while all other sectors have enjoyed job gains close to 20 %. The ongoing trade war, fueled by U.S. protectionist policies, has weighed heavily on productivity, with the largest declines occurring in goods‑producing sectors such as manufacturing, agriculture, and construction. Economists note that the uncertainty and tariffs created by this environment discourage the capital expenditures that would boost efficiency.
Corporate Response and Outlook
There are tentative signs that Canadian firms are adapting. Earnings‑call transcripts show that tariffs are rarely discussed any more, suggesting companies are focusing on operational adjustments rather than political lobbying. Yet, without a decisive increase in investment—particularly in technology, equipment, and skills—productivity is unlikely to rebound on its own. The coming years will test whether Canada can reignite its productivity engine before demographic headwinds push the economy into prolonged stagnation.
In summary, Canada’s growth dilemma stems from a dual failure: insufficient labour‑force expansion as immigration wanes, and persistently weak productivity driven by low investment and an unfavourable trade environment. Addressing the productivity gap will require decisive policy actions to spur business investment, enhance innovation, and mitigate the adverse effects of U.S. protectionism, all while navigating a period of near‑zero population growth. Only then can the country hope to restart one of its stalled economic engines and secure sustainable long‑term prosperity.