What Now? Addressing the Burden of Canada's Slow-Growth Recovery

The Canadian economy faces serious short-term macroeconomic challenges, the most important of which is addressing the burden of our slow-growth recovery. The sources and consequences of this slow growth are the focus of this Commentary. Canadian monetary policy has little ability to further stimulate Canadian growth. Given the large amount of uncertainty now faced by Canadian firms, further reductions in the policy interest rate are unlikely to be effective in stimulating aggregate demand. In addition, the ongoing problems associated with very low interest rates cannot be ignored and may soon present the Bank of Canada with a compelling case for rate increases. Canadian fiscal authorities have more room to manoeuvre than their counterparts in many other developed countries. Yet there remain solid arguments for budgets to be brought back to balance in the next few years. One is that discretionary fiscal policy is an ineffective pro-growth policy when the economy is not experiencing a sudden collapse of aggregate demand. Another is the longer-term budgetary challenges that Canadian governments will face over the next few decades as a result of population aging. Neither fiscal nor monetary policy is therefore likely to stimulate Canada’s economic growth over the next few years. This lack of stimulus from traditional macroeconomic policy suggests that any pick-up in Canadian growth will rely on a recovery of private demand. Given the lingering uncertainty and the continued slow pace of the global economic recovery, however, a significant rebound in Canadian private demand is unlikely in the near future. High household debt suggests that consumption is an improbable source of near-term growth. An investment revival will require a return of corporate confidence, while a rally in Canadian exports will depend on a strong and sustained foreign recovery. A central conclusion of this Commentary is therefore that Canadian policymakers should accept the continuation of Canada’s slow-growth recovery for the next few years. Slow growth has undesirable consequences, however, including longer unemployment spells, more part-time employment, and a greater incidence of long-term unemployment. Policymakers should focus on addressing the associated burden by enhancing income support for the unemployed, increasing the mobility of workers and improving incentives for labour-market training.