Figure 1: Components of aggregate demand in selected countries, 2023

Figure 2: Labor Productivity (GDP per hour worked), Index 2018 = 100

Extract A: Canada's structural competitiveness and trade performance

Following the global economic disruptions of the early 2020s, the Canadian government repeatedly emphasized its commitment to securing a diversified, high-growth export recovery. However, deep-seated structural imbalances within the domestic economy continue to hinder this ambition.

While resource-led exports (such as crude oil and mineral products) have periodically shown strong prices, Canada's overall non-resource trade balance remains weak, contributing to a persistent current account deficit of 4.8% of GDP in late 2023. This imbalance is heavily driven by a structural deficit in advanced manufactured goods and machinery, which consistently offsets Canada’s strengths in service exports like digital finance, engineering consulting, and entertainment software.

Policymakers have targeted a bold expansion of value-added manufacturing and tech exports to rebalance the economy away from raw resources. Yet, actual growth in these high-value export sectors has lagged behind expectations. High regulatory burdens, domestic transport infrastructure bottlenecks, and stagnant capital formation have constrained domestic industrial capacity. Non-resource manufacturing output remains about 7.2% below its peak from the previous decade.

Simultaneously, aggregate demand is heavily supported by private consumption. Canadian households continue to borrow heavily to sustain consumption levels, leaving Canada with one of the highest household debt-to-income ratios in the G7. This high level of domestic demand absorbs substantial quantities of imported consumer goods and services, exacerbating the trade deficit.

Central to these competitiveness issues is Canada's persistent "productivity gap." Workers in Canada produce less output per hour worked than peers in the United States and Germany. Since 2018, productivity growth in the United States has accelerated, leaving Canada significantly behind. To address this, economists urge deep supply-side reforms: streamlining inter-provincial trade regulations, offering targeted tax credits for business R&D and machinery investment, and modernizing vocational training in advanced automation and clean-energy technologies.

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