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Canada’s economy is on a sugar high. Government borrowing and easy money have fueled the rush. The most recent national accounts data, from the third quarter of 2021, show nominal GDP — incomes and expenditures measured in current dollars — up more than 12 per cent from a year earlier. Subsequent numbers show that even with COVID restrictions, consumption is strong. Housing has been on a tear.

Why call this surge a sugar rush rather than a sign of underlying strength? A key reason is inflation. Higher prices accounted for two-thirds of that 12 per cent year-over-year increase in nominal GDP in the third quarter. Real GDP did also rebound from the COVID recession over that period, but only by four per cent. The consumer price index, up nearly five per cent year-over-year in late 2021, tells the same story. Our spending is outpacing our capacity to produce goods and services.

With Omicron giving us near-term wobbles, it’s tempting to enjoy the high and leave future concerns for later. But COVID and the policy response to it have raised the stakes. We have long known that, as the boomers aged, rising health care costs, population aging and fiscal stresses would be threats to the growth of Canadians’ living standards. The pandemic compressed what would have been a decade-plus grind into a two-year crisis. Now more than ever we need a healthy economy generating rising output and real incomes.

The federal government seems not to be worried. Its fall economic and fiscal update projected post-pandemic real growth well above two per cent through to 2026, and the 2021 federal budget featured real growth above two per cent for decades. That rosy forecast is key to the government’s assurances that its borrowing will become sustainable, and that it can finance its commitments — including more big-money programs to be unveiled in its 2022 budget — without ever-higher tax rates or a debt crisis.

But the economy can’t run on carbs forever. Even with much higher immigration, population growth will slow: to less than one per cent annually in the 2030s, and 0.8 per cent annually in the 2040s. The growth rates Ottawa is projecting would require real output and incomes to grow at more than one per cent per person every year. For that to happen, each worker needs more capital every year. That is the protein that supports economic growth.

And that protein is what the carbs-fueled Canadian economy is lacking. Since 2015 — even before COVID hit — business investment has been so weak that the capital available to each worker has been declining.

In an economy with rising output and living standards, the normal — indeed, the essential — trend in capital per worker is up. That has been the story in Canada: historically, we equipped our workers better year-by-year with the tools they needed to be productive and earn good incomes. As the figure shows, the real capital stock — non-residential buildings, infrastructure, equipment and intellectual property products — per member of Canada’s labour force rose steadily after the end of the early 2000s recession, increasing by 45 per cent by the beginning of 2015. Since then, however, the trend has been down. The spike in early 2020 is illusory — it reflects the temporary shrinking of the labour force when COVID hit. By the third quarter of 2021, the stock of capital per potential worker was down fully nine per cent from early 2015. From the perspective of the average Canadian worker, our capital stock is wearing out faster than we are replacing it.

That is one reason why recent projections from the OECD contrast strongly with those from the federal government. They take us past the sugar rush into the period when real nutrition matters. And they show real output per person in Canada growing less than 0.8 percent annually over the long term.

To raise growth up from the OECD’s scenario to the federal government’s happy view, we do not need more sugar: we need bone, sinew and muscle. Other countries are building their strength. The OECD’s December Economic Outlook showed real gross investment in 2021 and 2022 far outpacing growth of the work force in member countries overall. For 2021, investment per available worker in non-North American OECD countries is one-third higher than in Canada, while investment per available worker in the United States is more than twice as high. The OECD’s projections for 2022 show the gap widening even further. If non-North American OECD countries are adding a third more capital per worker than we are and the U.S. is adding twice as much, there’s no way our workers’ output or incomes can keep up.

If we are to give Canada’s expansion a more solid foundation and avoid a crash as the sugar high dissipates, we need to act more like our competitors. We need less borrowing and consuming, and more saving and investing. Canadian workers need better tools to produce, compete, and earn with. Saving and investing will provide the strength our economy needs to support public programs and private living standards in the years ahead.

William Robson is CEO of the C.D. Howe Institute, where Miles Wu is a Research Assistant.

Published in the Financial Post