As the Canadian economy continues to struggle with a productivity problem, particularly when compared to the U.S., a new report highlights the many ways Canada is lagging behind its southern neighbour, and how it can make strides to catch up.
The report, released Monday by Boston Consulting Group, said that Canada’s gross domestic product (GDP) per capita, a key productivity measure, has been “slipping for decades.”
When compared to U.S. states, Canada’s average GDP per capita was worse in 2023 than all but three of them.
“In 2023, Canada’s average GDP per capita lagged behind 47 of 50 U.S. states, ranking just above Arkansas, but below Alabama and Idaho. The top-performing U.S. state, New York, reported a GDP per capita nearly double Canada’s average,” the report said.
“This is not an isolated issue. Eight Canadian provinces rank among the bottom eleven performers in GDP per capita when compared to U.S. states.”
‘Six critical missions’
To address the issue, the report highlighted six “critical missions” that will aid Canada in closing the productivity gap with the U.S.
They include increasing business investment, capitalizing on the energy transition, embracing artificial intelligence (AI), building out “core and social” infrastructure, focusing on inclusive economic growth, and creating a more resilient economy in the face of a rapidly changing risk environment.
When it comes to the clean energy transition and the dissemination of AI technology around the globe, the report said Canada can position itself as a leader in both fields.
“Canada’s resource strengths, including in LNG, nuclear, and critical minerals, provide outsized potential to capture investment and expand exports in energy sector verticals that can support transition pathways in export markets,” it said.
“Generative AI (Gen-AI) alone has the potential to drive productivity improvements resulting in an estimated $200 billion in economic impact for Canada by 2030. To put this in perspective, this would represent approximately seven per cent of Canada’s current GDP.”
The reported also highlighted some of the systemic issues that are impacting Canadians’ quality of life, which in turn weigh on overall productivity.
It argued that many of the country’s infrastructure and public institutions “are not keeping pace with record-high population growth,” pointing to ongoing problems plaguing the housing market, public transit, the medical system and the electrical grid.
‘Systemic underinvestment’
According to the report, Canada’s economic output was far more competitive with the U.S. in previous decades. It noted that in 1997, Canada’s average GDP per capita outpaced eight states.
The authors of the report argued that the dismal productivity growth in recent years can be attributed to multiple factors, including “low and inefficient investment” and a “mix shift towards lower productivity spaces.”
“(The) U.S. generates 1.5 times higher gross fixed capital formation per worker. The gap is even wider in productivity enhancing spaces like intellectual property (IP) and machinery and equipment (M&E),” the report said.
And that gap isn’t isolated to a single region, province or industry, the report noted, as “all ten provinces lag well behind the average U.S. investment level per worker, with Ontario, Quebec and British Columbia trailing by more than two times.”
“As an example, U.S. companies in the information and communication sector invest roughly $80,000 per worker – over five times the $15,000 invested by their Canadian counterparts,” the report said.
“This gap reflects lower Canadian spending on ICT equipment, software, and R&D… this sector accounts for just 25 per cent of the total shortfall, highlighting systemic underinvestment across nearly all Canadian industries.”
The report’s authors argued that this productivity crisis represents a “pivotal moment” for Canada.
“The world is shifting at an unprecedented pace, reshaping economies, industries, and global power dynamics. We cannot afford to stand still,” they said.
The report called on large corporations, which it said employ 35 per cent of Canada’s private sector workforce, to step up investment in their workers, noting that small and medium sized businesses and startups should follow suit.
It also called on government leaders to “act with urgency, deploying critical regulatory, tax, and policy levers to unlock new opportunities and propel the nation forward.”
