Canada’s Next Growth Phase

Arunima Sinha (0:00)

Welcome to Thoughts on the Market. I'm Arunima Sinha from Morgan Stanley's Global and US Economics teams. Today, why Canada's economy may be closer to a new growth phase. It's Monday, October 5th at 10 a.m. in New York.

Canada has been in the news recently. There's been lots of headlines related to trade, around population growth, around weak productivity, years of underinvestment. And those are real constraints, and they have weighed on the near-term outlook. At Morgan Stanley, we are more constructive on the medium-term outlook for Canada. And we recently wrote a report around this along with our strategists titled Canada, The Next Acceleration. And from our perspective, we think that the near-term uncertainty around trade is actually clouding the opportunity for global investors.

There are three points that we make in the report. We estimate that the growth model in Canada over the next three to four years can actually pivot from the export-led growth story that we've seen over the past few years into one that emphasizes capital deepening and greater technological diffusion across the economy. So it really is about the domestic build-out. And the opportunity in shifting away from trade and export-led growth into a more productive economy that's not just larger over time, but can actually grow at a much faster pace as well. And so by our estimates, we think that potential growth in Canada could feasibly rise from about one and a half percent to closer to one and three quarters percent.

The way that we see it, this really doesn't require things to start from scratch. There are already large capital pipelines that are in place. But one of the things that we do note is that a lot of these pipelines are actually concentrated in a few sectors. So about half of these are in utilities and oil and gas, transportation. These sectors together combine about 13 to 14 percent of the gross value add for the economy, but they actually account for more than half of the announced capital pipelines. And so for the money that's going into the economy, and a lot of this is going into structures, it's not going as much into machinery and equipment. And so while the capital build out is going to support the widening, we also need to think about crowding in private investment into other sectors. And some of these other sectors that we've identified in the notes, such as finance, information services, that have historically have had much greater gains in productivity, they would need to see bigger capital intentions as well. The other opportunity that we identify for the Canadian growth model is, although the near-term population growth has been slowing, it doesn't actually change the longer-run demographic picture. We looked at what the numbers would be for the working age population growth for Canada taking 2025 as a starting point. And what we see is that Canadian working age population is going to rise by about 3% by 2035, by 5% by 2040, and 6% by 2045 Meanwhile, most of the developed economy peers are going to see shrinkage in their working age populations. And so that is really going to give Canada a window into the rest of the 2030s to continue to accelerate its growth model.

From our perspective, the test for the next few years is going to be whether the investment that's being undertaken in a few sectors spreads beyond the big projects, and it really lifts productivity across the economy. Construction, manufacturing, agriculture and wholesale will be especially important because they are machinery intensive, technology adoption remains low, and recent productivity gaps are large. If those sectors begin to improve, Canada could enter the 2030s with a much stronger growth engine than it has today. And in our perspective, Canada's potential growth could actually pivot from being about 1.5% today to entering the 2030s with close to 2% in potential output growth.

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