Economy

	Grade		Grade
Income Per Capita		Unemployment Rate
GDP Growth		Employment Growth
Labour Productivity Growth		Inward FDI Performance Index
Inflation		Outward FDI Performance Index

What a difference a year makes! In order to understand the impact of the economic turbulence on Canada’s global standing, the current economic report card focuses on the most recent data—2008—for all of the economic indicators. Since the Conference Board began international benchmarking in 1996, there has never been a year when the relative rankings have changed so dramatically: Ireland fell from the top of the class in last year’s report to the bottom this year. Ireland is reeling from the global economic crisis and a meltdown in its domestic property market and construction sector. The Irish economy contracted by 2.7 per cent in 2008, labour productivity and employment fell, and foreign direct investment—the main stimulus for Ireland’s economic miracle of the past decade—evaporated. Ireland became the first EU country to fall into recession in 2008. Ireland’s fall from grace, however, should not detract from the real gains that it has made in its standard of living. It is still the third wealthiest country—as measured by income per capita—in our comparator group. Finland fell from 6th spot to 15th. Finland’s slide in late 2008 was sharper and steeper than even during its early 1990s recession. Because Finland depends heavily on exports for its economic strength, the drop off in export markets at the end of 2008—particularly Russian exports due to a decline in Russian oil and gas revenues—caused Finland’s industrial output to decline 16 per cent between December 2007 and December 2008.

It may seem counterintuitive that Canada remained in 11th spot in 2008, given that Canada’s income per capita fell in 2008, GDP growth was lower, employment growth was lower, and productivity growth was negative.

There are two reasons why Canada’s relative ranking did not change:

1. On some indicators, even though Canada did absolutely worse in 2008 than in 2007, it did not do as badly as other countries, so its relative position improved. For example, Canada’s labour productivity decreased by 1 per cent in 2008, after growing by 0.5 per cent in 2007, but its relative ranking improved from 14th to 12th place. This is because labour productivity growth in Ireland and Sweden fell by even more than in Canada—so Ireland moved from 2nd to 14th place on this indicator, and Sweden fell from 9th to 15th place.
2. Canada’s outward FDI continued to grow in 2008, resulting in Canada’s share of global outward FDI growing relative to Canada’s share of global GDP.

Canada’s idling in 11th spot means that now, more than ever, the fundamentals matter. For example, while most peer countries experienced a drop in labour productivity in 2008, Canada’s labour productivity growth has been lower than that of the top countries for many decades, hurting its international competitiveness. The Conference Board has long pointed out that improving the fundamentals—like productivity—is the only sustainable way to reduce the performance gap between Canada and other countries.  

The Conference Board’s overarching goal is to measure quality of life for Canada and its peers. We ask two questions: Do Canadians have a high quality of life? Is it sustainable?

When measuring the economic aspect of quality of life, we consider three dimensions:

1. Economic wealth
2. Economic disadvantage and hardship
3. Economic sustainability

1. Economic wealth is captured by income per capita. Income per capita reflects material living standards, that is, the capacity of Canadians to purchase the goods and services needed to live, such as housing, food, and clothing. It is also indicative of a country’s ability to sustain living standards through public spending on education, health, and infrastructure, as well as through private and public savings that can be used to generate future income and to support future consumption. At the macro level, a country that is not generating enough income is hampered in what it can do in other areas, such as the environment and education.
2. Economic disadvantage and hardship is measured by the unemployment rate. High unemployment hurts a country’s labour productivity and its gross domestic product (GDP) growth. High unemployment is also linked to elevated rates of poverty, homelessness, income inequality, crime, poor health outcomes, low self-esteem, and social exclusion. More detailed and nuanced indicators of economic disadvantage and hardship are included in the Society pages on this website—such as child poverty, elderly poverty, and income distribution.
3. Economic sustainability is defined here as a country’s ability to sustain its economic growth and prosperity into the future. There are several facets of economic sustainability: economic growth, macroeconomic stability, and global integration.

• Economic growth is represented by three indicators—real (that is, inflation-adjusted) GDP growth, labour productivity growth, and employment growth.
  • GDP growth is essential to sustaining living standards. A country that has a relatively high GDP level today is not guaranteed that this level will be maintained. Because future growth rates cannot be predicted with certainty, the Conference Board uses a three-year average of the most recent period as a proxy for the likelihood of sustaining economic growth.
  • Productivity growth is the single most important determinant of a country’s long-term GDP growth and per capita income, and it is therefore the only sustainable way to improve a country’s standard of living. Productivity can be enhanced by finding more efficient and effective ways to yield goods and services so that more can be produced with the same amount of effort. Productivity can also be improved by producing higher-value-added products and services that are worth more in the market place.
  • Employment growth is a driver of income per capita. It reflects the capacity of a country to absorb new workers joining the labour force and to use the labour resources available. A buoyant economy is one that is creating new jobs. The Conference Board uses a three-year average of the most recent period of employment growth.

• Macroeconomic stability is represented by a proxy indicator: the inflation rate.
  • The inflation rate reflects sustainability because rising prices erode the purchasing power of consumers; that is, inflation reduces the quantity of goods that can be purchased with a given amount of money. Periods of high inflation or deflation undermine the economy’s ability to sustain prosperity.

• Global integration: Conference Board research connects economic sustainability with a country’s ability to integrate in the global economy. With the rise of global supply chains and complex integration flows, it is difficult to assess a country’s status on global integration. The Conference Board uses two proxy indicators: the inward and outward foreign direct investment (FDI) performance indexes.
  • Inward FDI encourages the diffusion of technology management know-how, as well as more efficient resource allocation. Subsidiaries acquire knowledge and technologies from their international parent. Domestic firms that interact with these subsidiaries also benefit from these transfers of technology and knowledge. Ultimately, FDI leads to higher productivity, improved quality of products, and increased competitiveness. The Inward FDI Performance Index captures a country’s relative success in attracting global FDI.
  • Outward FDI opens access to foreign markets and promotes deeper integration into global supply chains, making an economy’s firms more efficient and competitive. Outward FDI promotes trade by developing new exporting (and importing) opportunities. The Outward FDI Performance Index captures a country’s relative success in taking advantage of foreign investment opportunities

Certainly Canada is still in the gifted class among nations. While the financial crisis and recession have had a negative effect on Canada and its 16 peer countries, they remain among the wealthiest in the world.

Among its peers, however, Canada’s 11th-place ranking means that it sits near the back of the class. Canada’s overall “B” in Economy masks its “C” grades on six of the individual indicators—income per capita, labour productivity growth, unemployment, employment growth, inward FDI, and outward FDI. Canada ends up with an overall “B” because its generally high “C”s, “A” on inflation, and “B” on GDP growth pull up its grade relative to peer countries with more uneven scores.

Norway moved from 3rd spot in the report card for 2007 to 1st position in the report card for 2008. Norway continues to lead the class in income per capita—nearly $9,200 above that of Canada—and it weathered the economic recession better than most of its peers in 2008. It was the only country to receive an “A” grade for employment growth in 2008, and it tied for 2nd place on GDP growth.

The radar diagram below is a snapshot of Canada’s economic performance (and the 17-country average performance) relative to that of the best-performing peer country—the outer ring—for each of the eight Economy indicators.

The chart has eight axes—one for each indicator—that radiate out from the centre. A score closer to the centre represents worse performance, while a score closer to the outer circle represents better performance.

Canada fares poorly when compared with the top performers; it is well below the best country on all indicators but inflation.

Compared to the 17-country average, Canada’s performance is above average on inflation; about average on income per capita, GDP growth, employment growth, inward FDI, and outward FDI; and below average on unemployment and labour productivity growth.

Use the pull-down menu to compare Canada’s economic performance with that of any of its peers.

When assessing economic performance, Canada naturally looks to the U.S., its closest neighbour and most important trading partner. Canadians know this relationship must be maintained carefully. But in the new integrative economy, this is perhaps too narrow a focus for comparison. As well, the financial crisis originated in the U.S., further reinforcing the fact that the U.S. is not the perfect role model.

The 1970s began with Canada in a remarkably positive position. Canadian living standards were high, and the pronounced rise in economic growth and productivity throughout the 1950s and 1960s meant governments had the fiscal room to spend widening Canada’s social safety net. At the 1967 world’s fair in Montréal, it really seemed as if Sir Wilfred Laurier’s 1904 prediction that “the 20th century belongs to Canada” was coming true.

Alas, his prediction did not come to pass. Canada’s overall economic performance has since deteriorated relative to its peers. The summary report card for each of the decades reveals that Canada’s economic performance slipped from a “B” in the 1970s to a “C” in the 1980s, 1990s, and most of the 2000s, although it has since edged back up to a “B.”

Why? Three factors are causing Canada to lose ground. First, Canada is a chronic laggard on several important economic indicators—most notably, productivity. Second, Canada has failed to keep pace in the growing competition for global investment. Third, even in some areas where Canada has improved, other countries are doing better.

The radar diagram below reveals that, relative to the top-performing peer countries, Canada’s best economic performance occurred in the 1970s and 1980s. With the notable exception of productivity growth and inflation, Canada’s 1970s and 1980s circles were closer to the outer ring, which represents the best-performing country on each indicator.

Canada’s relative performance has slipped slightly, from a “B” in the 1970s to a “C” in the 1980s, 1990s, and 2000s. Perhaps surprisingly, the G7 countries—against which Canada traditionally compared itself—are not the reason for Canada’s relative slip. The top seven spots in the report card for 2008 are taken up by non-G7 countries.

What will Canada’s Economy report card look like in 2010?