Canada's Economic Slowdown: What Investors Should Know for the 2020s

In this mini-series, we're taking a look at four macro-economic trends Canada is facing in the decade ahead, and how the nation can successfully navigate them to thrive. In this edition: economic slowdown.

The following is an excerpt from RBC Economics' recently released report, Navigating the 2020s.

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The Challenge

Aging will drive another trend of the 2020s: slow economic growth. Due to lacklustre growth in both productivity and the labour force, we expect only modest growth in the economic pie. Indeed, if productivity growth continues at the recent 10-year average of 1%, we're likely to see the Canadian economy expand at a modest rate of 1.5% to 2% a year during the 2020s. That's about a percentage point below estimates ahead of the Great Recession of 2008, and that percentage point gap adds up to an economy that's almost $250 billion smaller in 2030 than it would have been if earlier trends had held.

Canada's long-run structural growth challenges are not unique. High rates of immigration mean that Canada's long-run structural growth challenges actually look somewhat smaller compared to other advanced economies. Canada's working age population is still expected to grow at almost half a percent per year. That's far below the rate of growth in prior decades, but it's still better than most of Canada's advanced economy peers, including the United States.

As the current economic expansion stretches into year 11, we're also facing an elevated risk of recession, since downside risks are more numerous than upside ones. Nonetheless, we don't forecast a recession in Canada in 2020.

Ultra-low rates will persist

Central banks around the world cut interest rates in 2019 to stoke economic growth. Very low interest rates will be around for a while. Aging and tepid productivity are set to constrain growth in Canada and other countries, softening demand for credit. Ultra-low interest rates have enhanced household wealth by boosting prices for housing and equities. But they've hurt savers and pensioners, among others.

The era of extraordinarily low interest rates has forced central banks to become more creative in responding to periods of economic weakness. They're likely to have to rely even more on unconventional monetary policies, including forward guidance, quantitative easing, funding for credit and negative interest rates, which all may turn out to be less effective than traditional rate cuts.

Freer trade could be harder to achieve

Global trade tensions have given rise to concerns that a more far-reaching shift is taking place: the end of globalization. A surge in trade agreements and the global flow of goods and services over the past three decades has reshaped the world economy, and expansion of cross-border supply chains has boosted productivity and enhanced Canadian prosperity. A longer-term, global turn away from freer international trade would clearly be negative for a relatively small open economy like Canada's. A recent trend toward countries striking bilateral trade deals rather than multilateral agreements won't help.

There weren't many formal regional free trade arrangements before the formation of the WTO in 1995, meaning some of the trade deals that came in the years to follow were akin to plucking low-hanging fruit. The pace at which new regional trade agreements were being struck had already begun to slow before the Brexit vote or the election of Donald Trump, and that's likely to persist. And the boost from innovations in transportation and the entrance of major emerging markets into the global trading system that were seen in the 1980s and 1990s were positive shocks that probably won't be repeated in the medium term.

The Opportunity

Staying open to the world, and each other

Canada's share of real global GDP is set to fall to 1.4% in 2030 from 1.7% now, the Organisation for Economic Co-operation and Development (OECD) predicts. It will be imperative to look beyond Canada's borders for growth opportunities. While the U.S. is set to remain our biggest export customer, it too will likely account for a smaller share of global output, with India and China continuing to capture greater shares. However, there are countries that will see even faster growth than China in the coming decade. Among them: Bangladesh, Vietnam and Kenya.

Canada's challenge will be to leverage its existing strengths—for instance in agriculture, where we have a significant opportunity to capture a larger share of global agricultural exports. And to develop new ones. Despite our world-leading educational attainment, we still are not a top exporter of ideas.

Free trade deals can offer growth at the margins

While there are diminishing opportunities for global free trade deals, Canada still has something to gain from championing free trade. In the last three years, it pushed forward new trade deals with the European Union (CETA), Pacific Rim countries (CPTPP) and Ukraine. These agreements will add about 0.5% to GDP in the years to come. Even marginal gains are important in the face of rising domestic growth headwinds from an aging population.

Made-in-Canada freer trade

Even as Canada champions external free trade, there's a domestic solution that could pack more economic punch. Just 20% of small- and medium-sized enterprises (SMEs) in Canada sell to other provinces. Reducing interprovincial trade barriers by just 10% could boost GDP by 0.6% over three years, according to the Bank of Canada—a bigger impact than CETA and CPTPP combined.

The 2017 Canadian Free Trade Agreement between the federal, provincial and territorial governments was a step in the right direction. Since then, Alberta trimmed its list of CFTA exemptions last year, and now has the fewest restrictions to interprovincial trade.

> IN CASE YOU MISSED IT: Part 1 – Climate