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Slower growth new economic reality, Bank of Canada says

The Bank of Canada is seen in Ottawa on September 6, 2011.


Slow growth: Get used to it.

That's the conclusion of a Bank of Canada research report released on Thursday titled Is Slower Growth the New Normal in Advanced Economies?

"Overall, there is increasing evidence that growth in advanced economies may remain slow in the immediate future compared to its pre-[financial] crisis average, as a result of a combination of cyclical and structural factors," according to authors Abeer Reza and Subrata Sarker.

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The cyclical factors – including households and governments getting their debts under control – will eventually ease, according to the report contained in the autumn edition of the Bank of Canada Review, a twice-yearly collection of academic papers by bank economists.

But longer-term factors, including the aging population and slowing labour force expansion, will continue to take a bite out of growth.

The economy has typically bounced back rapidly from recessions with above-average growth. But that did not happen after the Great Recession of 2008-09. Instead, growth averaged just 1.4 per cent a year in advanced economies between 2010 and 2014, down from an average 3.6 per cent a year from 1985 to 2007.

"Growth has continually disappointed and forecasters have regularly adjusted their forecasts downward," the report pointed out.

The Bank of Canada, for example, has repeatedly revised its forecasts lower – most recently in October, when it cut its forecast of gross domestic product to 2 per cent in 2016 and 2.5 per cent in 2017, down from 2.3 and 2.6 per cent, respectively.

The most significant longer-term problem is the slowing growth rate of the working-age population as the baby boom generation retires. In Japan, the working-age population is already shrinking.

The report pointed out that later retirement and increased participation by women have in the past helped offset demographic trends.

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"There is likely less scope for these trends to continue," according to the report.

"Unless these demographic forces are offset by rising productivity or higher immigration, they will result in slower potential growth for any given rate of labour productivity."

The report, however, said monetary policy is already adapting to the new reality. And the authors reject the notion that economies are headed for lasting stagnation.

"Even though a decline in potential growth may reduce the neutral [interest] rate in many economies, monetary policy makers still have ample room to manoeuvre."

Also on Thursday, the central bank confirmed it will begin publishing a quarterly consumer confidence survey some time in 2016. The bank is already collecting the data, but has generally not made the findings public. The Canadian Survey of Consumer Expectations is similar to one created by the New York Federal Reserve, and will track Canadians' attitudes about inflation, the job market, household income and spending as well as house prices.

The key component of the survey is the inflation data, which is lacking in the Conference Board of Canada's monthly consumer confidence index.

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"For an inflation-targeting central bank like the Bank of Canada, monitoring the behaviour of inflation expectations is critical to gauging current and prospective inflation pressures," according to another research paper contained in the Bank of Canada's autumn review.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More


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