Weaker economic growth potential in Canada will cascade through financial markets and limit investment returns, according to a new report from economists at Quebec’s Desjardins Group.
Desjardins economists outline a lower growth future driven by demographics, which will lead to a higher risk of recession, slower growth in consumption and residential investment, and weaker growth in government tax revenues.
Moreover, the report says that financial markets will also feel the effects, “as interest rates will tend to be lower and stock prices will have less potential to rise. Returns on savings and pension plans will therefore be weaker.”
Desjardins says that it sees slower growth in consumer spending and residential investment that will translate into softer growth for corporate profits. “We could hope that businesses will manage to offset some of this shortfall by increasing their trade abroad. However, international competition is fierce and everything suggests that Canadian businesses will continue to struggle to win global market share,” it says.
Conversely, it expects slightly higher wage growth. “This is clearly good news for Canadian workers, taken individually,” it says. “However, as the forecast rise in productivity is fairly small, the additional wage growth resulting from efficiency gains will not be enough to entirely offset the overall slowdown in Canadian earnings due to slower growth in hours worked.”
This, in turn, means slower revenue growth for the federal and provincial governments. In response, they may have to slow their spending, at a time when their spending will be “under considerable upside pressure”, as population aging impacts health care spending.
Alternatively, they could take on more debt or raise tax rates, it says. “However, these two solutions have rather limited potential,” it says.
As for financial markets, Desjardins says that the weaker growth potential of Canada’s economy “will also have repercussions for interest rates, which will tend to be lower.” And, the slower corporate profit growth “could lead to weaker growth potential for stock markets in the coming decades.”
“The combination of lower interest rates and softer growth potential for stock markets means that returns on savings
and pension plans will be smaller in the coming decades,” the report says. This could push workers to save more, or retirees to cut their spending.
“Under these conditions, there will be considerable social and financial pressure to push back the age of retirement, a solution that would not only lessen the harmful effects of lower returns, but also partially offset the impact of slower growth in the working age population,” Desjardins concludes.