Macklem stresses the importance of GDP and GDP-per-capita

Article content

Canada may not technically be in a recession, but some economists argue the country’s declining per-capita output mimics trends of prior downturns, so there’s a need for policymakers to look beyond the overall positive economic numbers the country has posted in recent quarters.

Bank of Canada governor Tiff Macklem touched upon this on Wednesday when he announced a second consecutive cut in interest rates and said the central bank will “have to look at both” the total economic growth and the output per person to analyze the state of the economy while making interest rate decisions.

Article content

“Households have actually been cutting back on spending,” he said during the press conference. “But with high rates of immigration, there are more households, so that’s boosting the GDP (gross domestic product).”

From a business perspective, Macklem said it doesn’t matter whether the demand comes from individual households consuming more or whether there are more households.

The overall size of the economy has continued to grow and has narrowly avoided consecutive quarterly declines — the technical definition of a recession — in recent years despite high interest rates. But economists attribute that to a new wave of consumers due to Canada’s record increase of more than two million newcomers in the past two years.

Consumer spending accounts for more than half of the GDP and many newcomers are also workers who add to the economy’s productive capacity, economists from the Royal Bank of Canada said last week in a report.

GDP measures the total output created through the production of goods and services in a country during a certain period. It also measures the income earned from that production. GDP per capita is calculated by dividing the country’s total GDP by its total population.

Article content

Canada’s GDP per capita has declined in six of the past seven quarters.

The kind of situation where GDP is on the rise, but per-capita GDP is on the decline isn’t sustainable, said Benjamin Tal, an economist at the Canadian Imperial Bank of Commerce, since it means the economy is growing mainly due to population growth as opposed to being productive. Canada’s productivity numbers have also been declining in recent quarters.

“I think population growth is entering (policymakers’) psyche,” he said.

BMO Capital Markets economist Robert Kavcic said the per-capita numbers show a “little bit more truth,” such as the scaling back of spending, than the overall numbers show.

“That would be arguing in favour of the Bank of Canada cutting rates,” he said. “Maybe there’s some more weakness below the surface.”

Bank of Nova Scotia economist Rebekah Young, though, said the GDP versus GDP-per-capita debate risks “over-complicating” the message that needs to be communicated with respect to monetary policy.

“It’s a symptom, not a diagnosis of the state of the economy and its impacts on inflation and interest rates,” she said. “At the end of the day, the sources and drivers of demand and supply matter for the inflation outlook. Interest rate decisions are based on the net impact of those.”

• Email: nkarim@postmedia.com

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Share this article in your social network