June 27, 2023

The Canadian economy: bigger but not stronger  

Since March 2022, the Bank of Canada has been steadily raising interest rates in an effort to slow economic growth to curb inflation.

However, in spite of increasing its policy rate from near-zero to 4.75% over that period—the fastest increase in decades—the Canadian economy has remained stubbornly resilient. Or so the Bank of Canada has said.

But things aren’t as rosy as they appear. There’s an important factor driving the economy that is obscuring our sense of Canadians’ economic health: population growth.

Stripping away the effect of population growth reveals not just a cooler economy now—but a weaker Canadian economy longer term. 

Economic output

In the first quarter of 2023, GDP rose by 0.8%, equivalent to an annualized rate of around 3.1%. For an advanced economy like Canada, that represents a respectable pace of economic growth.

However, over the same time, immigration surged. Canada’s population jumped by 0.7% in the same quarter, equivalent to an annual increase of 2.8%. That’s the fastest population growth we’ve seen in more than 50 years.

The trouble is that surging population growth distorts the picture when we want to understand how the average Canadian is doing economically. It’s like saying that a bigger classroom outscored a smaller classroom, because they collectively earned more points on an exam.   

In the same way, Canada is earning more economic points, but only because we’re tallying the points of more people. In other words, the Canadian economy is not growing because we’re becoming better off. It’s growing because there are more of us around. And that is sending some misleading signals about the health of our economy.

In fact, when we instead look at averages, as opposed to totals, the Canadian economy is already in decline. While total GDP in the first quarter was about 2.2% higher than it was a year ago, GDP per person (“per capita”) was 0.5% lower.

Put simply, Canadians are worse off than they were a year ago. And it’s been this way for half a year now. Further, the monthly trend suggests the picture is worsening. There was no growth in economic output in March, even with population growth. This is not good.

Worst of all, GDP per capita now sits at a similar level to its value several years ago. Real, per person, economic value was $55,667 as of the first quarter versus $55,707 five years prior. That means we are not just worse off than we were three or six months ago; we are not doing any better than we were in 2018.   

Consumer spending

You might wonder if other metrics tell a rosier story. To answer this, let’s first look at consumer spending.

Consumer spending is another gauge of Canadians’ economic wellbeing. And it’s another measure that the Bank of Canada has claimed remains “surprisingly strong.”

But, again, what looks like growth in spending over the last couple of quarters mostly melts away when you account for the fact that there were simply more consumers.  

In fairness, there was a small increase in consumer spending in the first quarter of 2023. However, this modest increase of 1.2% hardly represents an out-of-control spending binge. It barely brings us in line with the spending levels of 5 years ago.

In other words, not only are Canadians producing no more economic value than they were as of 2018, they also are not spending any more. Considering higher prices are eating away some of these dollars, consumers are actually purchasing less.

Looking at various types of spending categories tells a similar story. Neither spending on goods (i.e., the things we buy), nor spending on services (e.g., hair cuts, Uber rides, etc.) has been exceptionally strong. Furthermore, the split between goods and services is now similar to what it was. This suggests neither segment of the economy is particularly strained to meet consumer demand, as it was in the outset of the pandemic when people spent more of their income on things like furniture and workout equipment in lieu of gym memberships and travel.

Business investment

Another measure worth investigating is business investment. Business investment provides insight into how businesses responded to higher interest rates and is especially telling of future growth. This is also where the data get especially damning.

Specifically, this measure captures spending by businesses on things like a new factory or store location, a new residential development, or machinery and equipment that supports business production or operations.

In this case, the decline is plainly apparent, even without adjusting for population growth. Business investment has fallen off a cliff.

This shouldn’t come as a surprise—and is to an extent “by design”: as interest rates go up, it becomes more expensive to borrow money, cooling spending on big-ticket projects and purchases. This is even more clear adjusting for the population growth.

Like GDP or consumer spending, business investment should also grow at least in line with the population. In fact, the wellbeing of new immigrants and current residents alike depends on it.

Immigrants do not simply come and “fill jobs.” They live in homes, frequent restaurants, and require tools, offices, software, and equipment to do good work. As the population grows, so too must the housing stock, number of store fronts, and tools available for workers that increase their productivity. This is necessary simply to maintain our existing standard of living. Adding a new carpenter to a job site won’t do much good if they have to share a hammer and hard hat.

When adjusted for population, we have seen a significant decline in business investment over the last year, so much so that it’s 8% below its level from 5 years ago. Compared with its 2014 peak, it is now 18% lower.  

This does not look like an overheated economy needing to be cooled. Instead, it looks like an icy foreshadowing of weak growth, longer-term. The OECD expects as much. Though there are a couple of forces at play, weak business investment is a primary factor.


While many believe the economy is overheated, in fact, the economic wellbeing of the average Canadian is eroding. Canadians are no better off today than they were 5 years ago and they’re not spending more either. More problematic still, weak business investment could further weigh on the economic outcomes of Canadians for years to come. This means that, beyond a risk of a recession in the near term, longer-term growth prospects are especially troubling. As immigration continues to fuel a bigger economy, this is a cautionary tale to always assess the economic wellbeing of Canadians, and not be misled by large numbers. 

Alicia Planincic, Economist & Manager of Policy

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