ANALYSIS: What Canada’s Latest GDP Growth Shows

The Toronto skyline is seen shrouded in fog as a man walks in the rain on Dec. 28, 2023. The Canadian Press/Frank Gunn

While Canada’s gross domestic product (GDP) grew slightly in the second quarter of 2024, several economists say the numbers show an over-reliance on government spending to encourage growth.

“The only way that our economy is growing right now is because we’re adding more people to the economy, and then the fact that we also have a lot of government spending, mainly on employee compensation, or hiring more employees in the public sector,” said Jake Fuss, director of fiscal studies at the Fraser Institute think tank.

The country’s GDP increased by 0.5 percent in the second quarter, after rising by 0.4 percent in the first quarter of 2024, Statistics Canada said in an Aug. 30 economic report. The report added that Canada’s per capita GDP fell by 0.1 percent in the second quarter, which was the fifth consecutive quarterly decline. Q2 saw the country’s population grow by 0.6 percent, or nearly 243,000 people, to more than 41 million, according to StatCan.

The report noted higher government consumption expenditures, business investment in machinery and equipment and engineering structures, as well as household spending for “rental fees for housing, food, and electricity.”

Specifically, government expenditures rose by 1.5 percent due to increases in employee compensation and “hours worked across all levels of government,” the report said, adding that federal and provincial government purchases of goods and services also rose.

At the same time, the second quarter saw declines in exports of goods and services (0.4 percent), residential construction, and household spending on goods including “new trucks, vans, and sport utility vehicles.”

While higher expenditures on housing, food, and electricity led to increased household spending, population growth outpaced this increase, resulting in per capita household expenditures falling by 0.4 percent.

Fuss said the decline in per capita GDP shows that while Canada’s economy is growing overall, individuals’ living standards are declining. During the 4 1/2-year period from mid-2019 to 2023 year-end, GDP per person fell by 3 percent, from around $59,900 to around $58,100, he said, while Canada’s population increased by more than three million people, from 37.4 million to 40.5 million.

While Fuss acknowledged that per capita GDP is a complicated metric, he said governments have failed to focus on “actual economic growth and on tangible increases in the standard of living,” and have instead increased the size of government.

He co-authored a Fraser Institute study, released in March, which indicated that the size of government in Canada as a whole in 2022 represented 40.5 percent of the country’s economy. The study also noted that for Canada as a whole, public-sector employment represented 21.2 percent of total employment in 2022, and that from 2007 to 2022, public-sector employment as a share of total employment increased in every province.

“That’s ... been the philosophy over the last number of years. If you increase government spending, you increase government investment in the economy, you increase the size of government overall,” Fuss said, noting that “it hasn’t paid off.”

Immigration and Government Spending

Greg Tkacz, an economics professor at St. Francis Xavier University, said the latest report on the second-quarter growth shows “good news” that Canada’s economy has avoided a recession.

“But the downside is that it looks like the economy is being kept afloat by certain sectors. That just can’t be sustainable the longer run,” he said, adding that declining GDP per capita is “the more worrisome aspect” of the StatCan report.

Tkacz said that government spending has a substantial impact on economic growth and that higher employee compensation would show up as higher government expenditures that would impact GDP growth in the second quarter.

Ian Lee, an associate professor at Carleton University’s Sprott School of Business, said the data shows that increased immigration and government spending have had a “disproportionate” impact on Canada’s economic data in the second quarter. Canada has increased its immigration levels to record numbers in recent years and plans to bring in 485,000 new permanent residents in 2024.

Lee said it is “curious” that Ottawa has been increasing the size and spending of government and running deficits at a time when the economy is growing.

“John Maynard Keynes taught us that you run deficits when the economy is in a recession and then you run surpluses when the economy is in a growth period,” he said, referencing the influential early 20th-century British economist.

“What they’re doing now is they’re stimulating the economy,” he said, adding that “deficits are, by definition, stimulative,” as “you’re injecting money into the flow.”

Lee said that when Prime Minister Jean Chrétien was in power, the size of the government decreased by tens of thousands of employees and operational program spending was cut by around 20 percent in order to reduce the deficit faster and restore fiscal discipline. While many warned the program review exercise of the mid-1990s would cause a recession, it actually ended up stimulating economic growth, he said.

“So you can’t draw a straight line and say, just because you cut immigration, the GDP is going to collapse, or because you cut public service, that the GDP is going to collapse,” he said.

“The economy is dynamic, and decision-makers respond to all of that information out there. And if they think that these are going to produce a stronger economy by making the government more efficient and making immigration sustainable, businesses will go and start investing and spending, and then they'll start hiring.”