California dreamin'
David Wolf
From the March 13-26, 2006 issue of Canadian Business magazine
Canada is moving up in the world. The fourth-quarter national accounts released on Feb. 28 revealed that our economy passed the US$1-trillion mark in gross domestic product for the first time in history, joining 13-digit titans America, Japan, Germany, Britain, France, China, Italy and Spain. In fact, Canada blew right past the mark, with output totalling US$1.13 trillion for 2005 as a whole, and with strong growth through the year tacking on another US$100 billion in the Q4 annualized estimate. Canada's economy in international benchmark U.S.-dollar terms has grown 91% over the past decade, and 58% in the past four years alone.
That strong recent growth has vaulted Canada up the international league tables. We estimate that Canada overtook Spain as the eighth-largest economy in the world in 2005. Ten years ago, Japan's economy was nine times larger than Canada's; it's now only four times larger. As recently as three years ago, the gross state product of New York was bigger than Canada's GDP; we estimate that it's now 17% smaller. Of course, the whole U.S. economic behemoth, at US$12.5 trillion, is still 11 times bigger than us, but that's down from a consistent 14 times bigger between 1998 and 2002.
Does any of this matter for anything other than national pride? Practically speaking, probably not. The International Monetary Fund doesn't give out bonus special drawing rights for hitting the trillion-dollar mark. There's no fancy club we can now join (the G8 is probably the closest thing, but we're already members). Canada more generally has always seemed to punch above its economic weight in international policy circles; while a little extra mustard certainly doesn't hurt, it isn't going to get us into the heavyweight division. And measuring economic size at current prices and exchange rates isn't always the best guide to clout; the purchasing power parity measure preferred by many economists lifts China from sixth- to second-largest economy in the world, a ranking better matching our intuitive sense of the world today.
Still, Canada's achievement of a trillion dollars in output and its move up the international economic pecking order do usefully summarize the country's economic renaissance of recent years. To be sure, part of it has been luck, as strong global demand has driven a surge in the prices of the commodities with which Canada earns its way in the world. Higher prices for oil, gas and metals do double duty in lifting Canada's U.S.-dollar-measured GDP, boosting both our terms of trade and our currency. But an improved domestic macroeconomic framework has played an important role as well, as the economy is reaping the dividends of the fiscal balance and price stability restored in the 1990s, which have positioned Canada to make the most of a favourable external environment.
For Canada to make further progress up the international league tables, though, the domestic side will have to contribute even more. The Canadian economy has already seemingly picked the low-hanging fruit, so to speak, of the strong global economy. It is unlikely that even sustained robust world growth would lead to the same incremental rises in commodity prices and the Canadian dollar over the next three years as over the past three. (That would put oil at US$122 a barrel and the loonie at US$1.07.) To keep up the pace, higher sustained real GDP growth will be needed, and that demands a vast improvement on the past three years' 0.2% average annual growth in productivity. Increased capital deepening in recent years, an emerging scarcity of domestic labour (particularly out west), intensifying competitive pressures and even the invigorated market for corporate control are all reasons to expect stronger productivity growth ahead. But even more efficient Canadian industry won't be enough if the global economy turns out weaker than currently looks likely.
In any event, should the past three years' growth rates somehow be sustained, we estimate that Canada's economy could in fact catch California's by 2010. That may be highly unlikely. But to paraphrase the Mamas and the Papas, it is nice to dream on such a winter's day.
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