Chart of the Month – September 2020

Population Effect on GDP – Canada and USA


Many people ask why has the Canadian economy lagged that of our southern neighbour? Often what those posing this question truly mean, is why has the Canadian stock market lagged that of the larger U.S. market, gaining only 5.7% on an annualized basis over the last 30 years, versus the more impressive 8.3% for the S&P500?

The performance of the respective stock markets, however, does not tell the whole tale. In fact, over the past sixty years, the Canadian economy, as measured by GDP, has outperformed the U.S., growing at a rate of 6.5% per year compared to U.S growth at 6.3%. Moving past our obsession with financial markets as the only measure to evaluate success, let’s look at the underlying determinants of economic growth.

Economic theory suggests that the pace of growth for a country will depend on its growth in the working-age population plus the improvements in efficiency. Simply put, how many more people are working this year over last and how much more can each person produce this year compared to last. When we look at population growth, this is where Canada has had an advantage. Given our country’s open immigration policy, as per the chart above, we have benefited from a faster rate of population growth than the U.S. However, that also means that by comparison, we have not done as effective a job of enhancing productivity from those workers. The key to faster growth in Canada is improving productivity.

As a final point, let’s take this framework outside of the North American sphere to Asia. According to OECD data, in Japan, the working-age population has been on a decline since the 1990’s and is expected to drop another 20% by 2040. China’s working-age population has also likely peaked and now will begin to decline due to the impact of the one-child policy. If these trends and economic theory hold true, then Canada could have an advantage in the coming years as we continue to use immigration to grow our population base. We then just need to drive productivity in order to become growth leaders.

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