the canadian economy: recession, recovery and transformation
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The Canadian Economy: Recession, Recovery and Transformation. APEGGA April 23, 2009 Glen Hodgson Senior Vice-President & Chief Economist [email protected]. The economic outlook in exceptional times The financial crisis - PowerPoint PPT PresentationTRANSCRIPT
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The Canadian Economy:Recession, Recovery and
Transformation
APEGGAApril 23, 2009
Glen Hodgson Senior Vice-President & Chief Economist
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Three Themes for Today
• The economic outlook in exceptional times
• The financial crisis
• Transformation: what will the world look like after recovery?
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Global Economic Highlights
• The world economy will contract by 1 per cent in 2009, even with policy intervention
• The U.S. financial crisis and recession has rippled around the world
• Sustained but slower growth in emerging markets, led by China and India, is barely blunting the impact of a U.S. slowdown
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U.S. Outlook
• U.S. economy is in deep recession
• Consumer spending to fall for 5 quarters as confidence collapses
• Heavy government intervention to address the financial crisis and provide stimulus
• Some faint glimmers of good news beginning to emerge
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'jan09
150
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190
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230Sales avg. price
U.S. Existing Home Sales and Prices (millions SAAR; $’000)
Source: National Assn. of Realtors.
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-700
-600
-500
-400
-300
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-100
0
100
200
U.S. Labour Market(Change in U.S. Employment, 000s)
Source: Bureau of Economic Analysis.
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U.S. Consumer Confidence – Lowest in History(1985=100)
Source: The Conference Board Inc.
20
30
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U.S. Real Consumer Spending Growth(per cent change, annualized)
Sources: BEA; CBoC
-8.0-7.0-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.0
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US Federal Deficit(Unified, $billions)
Sources: BEA; Moody’s Economy.com
-1900-1700-1500-1300-1100
-900-700-500-300-100100300500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
U.S. Real GDP(per cent change)
Sources: BEA; CBoC.
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Canadian Outlook
• Canada dragged down by global recession and sharp drop in commodity prices
• Fiscal stimulus packages in Canada and the United States will eventually pull us out of recession
• Employment will decline throughout 2009 and the unemployment rate will peak at just below 9.5 per cent in mid 2010
• A recovery is in store for 2010, with real GDP growth rebounding to 2.5 per cent
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Raw Materials Price Index (per cent change)
Sources: The Conference Board of Canada; Statistics Canada
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Real Exports (per cent change, 2000–10)
Sources: The Conference Board of Canada; Statistics Canada.
-12.0
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99 0 1 2 3 4 5 6 7 8 09f 10f 11f
Sources: The Conference Board of Canada; BEA; Statistics Canada.
Canada
Interest Rates (90-Day T-Bill) Quarterly 1999–11
U.S.
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68
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80
84
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104
Exchange Rate 2000–10U.S. cents per Canadian dollar
Sources: The Conference Board of Canada; Statistics Canada.
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Index of Consumer Confidence, CanadaJan 2003–Mar 09 (2002 =100)
65
70
75
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90
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105
Source: The Conference Board of Canada.
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Employment Growth Canada, 2000–10
Sources: The Conference Board of Canada; Statistics Canada.
340,000 job losses
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1981 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13Sources: The Conference Board of Canada; Statistics Canada.
Unemployment Rate
Natural rate
Unemployment Rate vs. Natural Rate (percent), 1981-2013
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1981 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13Sources: The Conference Board of Canada; Statistics Canada.
Unemployment Rate
Natural rate
Unemployment Rate vs. Natural Rate (percent), 1981-2013
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Real Consumer Spending Growth Canada 2001–10
Sources: The Conference Board of Canada; Statistics Canada.
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1
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2001 2002 2003 2004 2005 2006 2007 08f 09f 10f
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Housing Starts vs. Demographic Requirements Canada 2001–10 (000s)
Sources: The Conference Board of Canada; Canada Mortgage and Housing Corporation.
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160
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1 2 3 4 5 6 7 08f 09f 10f
Household formation
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Pre–Tax Corporate Profits(per cent share of net domestic income)
Sources: The Conference Board of Canada; Statistics Canada.
18 per cent in 2008Q3
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Real Business Investment Growth (Canada 2001–10)
Sources: The Conference Board of Canada; Statistics Canada.
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-40
-30
-20
-10
0
10
20
Federal Provinces
Federal and Regional BalancesNational Accounts Basis ($ billions)
Sources: Statistics Canada; The Conference Board of Canada.
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Real Government Spending on Goods and Services Canada (per cent change, 2000–10)
Sources: The Conference Board of Canada; Statistics Canada.
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Real GDP Growth Rate Canada 2001–09
Sources: The Conference Board of Canada; Statistics Canada.
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Conclusions
• Some signs that key U.S. markets are nearing bottom—a modest recovery in residential construction and auto sales is forecast for the second half of 2009
• Strengthening raw material prices in 2010 will provide a boost to domestic economy
• Recession will lift unemployment rate but labour markets will remain tight across many occupations
• Path back to balanced budget will be slow for the federal government while provincial governments are in a more difficult bind
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The Financial Crisis: A Perfect Storm
Two underlying conditions:1. Global savings – investment imbalances
– Massive global savings available – Asia and oil
– Supported by accommodative U.S. monetary policy
2. Unconstrained financial market innovation and leveraging– Insufficient financial market regulation at all levels
– New financial instruments (securitization, credit swaps)
– Global distribution networks
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Worst-Hit U.S. Housing Markets (price declines Dec. 2008/Dec. 2006, %)
• Phoenix -44• Las Vegas -43 • Miami -41
• San Francisco -39
• Sacramento -36
• Los Angeles -36
• Tampa Bay -32
• Detroit -32
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Global Action, Sept–Oct 2008
• U.S. government intervention to save two investment banks – but not Lehman Brothers
• Nationalization of key U.S. institutions (Fannie and Freddie, AIG)
• $700 B funding obtained from Congress, of which $250 B in government equity invested in banks
• Coordinated intervention by EU governments – equity injections, guarantee inter-bank credit lines
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Credit Spreads Have Stabilized(3-month Libor minus 3-month US T-bills)
Source: Moody’s Economy Inc.
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'sep2 'sep17 'oct1 'oct16 'oct30 'nov13 'nov 28 'dec12 'dec30 'jan14 'jan29 'feb12 'feb26 'mar12
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So Where Are We, Six Months On?
• Financial markets not back to normal anywhere
• Central banks forced to slash rates and even introduce quantitative easing to kick-start their economies
• Governments are purchasing and guaranteeing loan assets to inject liquidity and free up bank capital
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Aggressive Global Monetary Policy
Central banks around the world have taken aggressive action
• U.S. and Japan; rates almost at zero• Bank of England has cut short rates to lowest level
ever – since 1694!• Many have introduced quantitative easing (QE) --
money creation via bond purchases• ECB is finally cutting rates on the continent
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2002 2003 2004 2005 2006 2007 2008 2009
U.S. Japan UK Euro Zone
Short-term Interest Rates (per cent)
Source: Consensus Economics.
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Spread between High Yield Debt and 10-Year Treasury Notes
Inc.
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aug sep oct nov dec 'jan09 feb
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Federal Reserve Balance Sheet(total assets, $billions)
Source: FRB.
600800
10001200140016001800200022002400
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Renewed U.S. Action: The Geithner Plan
• Create a $1 trillion public-private market for illiquid mortgage-backed securities, rather than a “bad bank”
• Stress testing of banks to ensure they can withstand a prolonger recession
• U.S. Treasury to supplement credit program with up to $1 trillion in new government credit
• $175 billion mortgage refinancing plan: – $100 billion more to backstop Freddie and Fannie– Individual incentives to refinance mortgages – how
to separate “can’t pay” from “won’t pay” ?
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Equity or Nationalization?
• Saving the financial system: more equity and guarantees, or nationalization?
– Government ownership of Citigroup to rise to 36 per cent of common stock
– But government is very reluctant to fully nationalize key institutions – even AIG
– Major banks begin shift to black – W-F, B of A, Citi
• $175 billion mortgage refinancing plan:– $100 billion more to help Freddie and Fannie
– Incentives to refinance mortgages – how to separate “can’t pay” from “won’t pay” ?
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The Fed’s Latest Bold Moves
March 18, the Fed threw everything it has at the financial crisis:•QE: $300 billion to purchase long-maturity Treasuries, driving down long rates by 50 bps•Doubling, to $1.45 trillion, the securities purchased from Fannie Mae and Freddie Mac•$1 trillion to buy private securities and rebuild credit markets
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And Room for Even More
• Obama budget for 09–10 includes another $250 billion on-budget for re-starting credit
• Price tag so far: $10 trillion and rising
• And the bottom is not yet reached—more to come through ‘09
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Action in Europe• U.K. government prepared to use taxpayer
money to ensure that banks survive prolonged recession
• Iceland was forced to nationalize its major banks last year following collapse
• German banks hold $1 trillion euros in risky assets and have only written down 25 per cent
• More trouble on horizon, since banks in Western Europe hold 90 per cent of East European debt
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Canadian Action
Canada doing much better than other countries, but we too are feeling the pain
•Federal government offer to purchase up to $125 billion in CMHC-insured mortgages from banks•ABCP market freeze has been resolved –after a year •$350 million capital to BDC and EDC, with increased leverage
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Direct Government Intervention (cont.) • Canadian Secured Credit Facility—Fed govt.
will purchase up to $12 billion in asset-backed securities
• Assurance Facilities: Fed govt. ready to insure borrowing by banks and insurers to reduce any competitive disadvantage
• Bank of Canada accepting much riskier collateral
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Canadian Access to Credit
• Total bank lending to business up by 11.5 per cent in Jan ‘09 over previous year
• But commercial paper market still shrinking • Risk spreads up by about 2 per cent • Banks rebuilding balance sheets and loss provisions• Canadian banking system still profitable; Q4 2008
bank profits down but positive• Non-banks and foreign banks retreating from Cdn.
market, Cdn. banks buying key assets (e.g. car loans)
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Mortgages and Other Credit Markets
• Annual mortgage lending up 10.7 per cent (Dec 2008)
• Last 2 decreases in bank rate matched by decreases in mortgage rates
– freeing up purchasing power and improving affordability
• But senior loan officers continue to report tightening in lending conditions
• Consumer credit remains under pressure
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U.S Financial Crisis: Our Assessment
• U.S. government will stabilize the financial system —regardless the huge cost
• Outright nationalization a last resort, to be avoided if at all possible
• This means continuing equity and guarantee support for key banks—while others will fail
• Fed has jumped in with both feet• Mortgage refinancing plan will help to form a
bottom for the housing market– But subject to further adjustment and cash injections
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Global Financial Crisis: Our Assessment
• Governments at different stages of response
• U.K. government seems ready to ensure its banks will survive prolonged recession
• Some other governments still in earlier stages of reacting – e.g. Germany
• The big scare: Eastern European debt
• Canadian financial system looks remarkably well-positioned , although it will take all of 2009 to rebuild more normal credit.
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Transformation: Where Are We Going Next?
• Recessions are usually a catalyst for transformation
• So what will be different when the economy recovers?
• We expect macro forces to be at work as well as structural changes within industries
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Big Global Drivers
• Shifting economic tectonic plates: the rise of China, India and other emerging nations
• Global value chains and “integrative trade”
• Energy and climate change
• Aging labour force in the industrialized world
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The World Economy: Slower Growth Potential
• Americans to save more and spend less
• World economy needs a new growth driver since American consumer retrenching
• But consumers in Asia-Pacific won’t pick up all the slack —cultural reasons, need to save due to lack of safety net
• Therefore, global economy to experience sub-par medium-term growth (2.5% per year)
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Fiscal Policy, Give and Take
• Short-term fiscal stimulus is critical to recovery and will boost output in 2010 and 2011
• But fiscal stimulus will be withdrawn as governments grapple with deficits and debt burden
• Fiscal consolidation means slower MT growth
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What About Globalization?
• Globalization process similar to period around World War I
• Increased trade protection, despite promises from politicians
• Fewer bilateral trade deals• Tension: Need for investment, but pressure for
controls on FDI due to fears of sovereign wealth funds
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Aging Among the G-7 • Most G-7 countries are aging rapidly and facing
much slower economic growth
• Japan, Italy and Germany at ZPG
• Despite higher birth rates and immigration, U.S. growth potential will ease to 2.5 per cent in 2020
• U.S. still has advantage of more flexible economy, younger and growing population
• But: twin deficits are a major medium-term risk
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Canada to 2030
• Aging population will drive changes in the economy
• Supply constraints on labour already here
• Immigrants will be the sole source of population growth by 2030
• Potential output weakens through 2030
• Capital spending the strongest source of growth
• Productivity gains would help sustain GDP
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Energy
• Renewed upward pressure on oil and gas prices as global demand returns and supply gets tighter
• Greening of energy production is here to stay
• Race to find alternative energy sources will mean strong diversification within the industry
• Industry rationalization on the rise again – as well as expanded role for emerging market players
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Resource Processing
• Products that new markets demand, rather than trying to convince them to buy what we make
• High value-added niches, not commodities -- compete on quality, design and service– E.g. derive more value from forest resources by
making energy substitutes rather than pulp and lumber
• Transitioning workforces and regional economies to new and/or growing products and services
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Life Sciences
• Demographic pressures mean shift from disease treatment to maintenance and prevention
• Long-term and chronic care will increasingly take precedence over acute care
• Diseases in developing countries will grow in importance
• Emerging markets will demand access to drugs at low prices via forced licensing or even ignoring patent protections
• Growing financing requirements for R&D etc
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Automotive
• Fewer players -- Detroit 3 becomes the Detroit 2 or even Detroit 1, and Japan will go off-shore
• Changed product offerings -- fewer light trucks, more fuel efficient vehicles, decline of internal combustion engine
• New selling model -- fewer dealerships, leasing changes, on-demand supply
• Lower cost structure – wages, pressure on suppliers
• Designers and marketers, or builders?
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Aerospace
• Higher energy costs drive demand for ever more fuel efficient airframes and engines
• Materials science produces lighter weight materials and innovations in vehicle design
• Military seeking more off-the-shelf components and solutions rather than design from scratch
• New air travel demand from middle class in developing markets
• New infrastructure for air travel -- air traffic control, regional airports, noise, GHGs
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Conclusions
• We are about half-way through the current financial mess and recession
• The Canadian recovery is not here yet – but it’s on the horizon
• The world will not be the same as we emerge into recovery
• So be ready to dance on your toes!
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Highlights: Canada to 2030
• Aging population will drive changes in the economy
• Supply constraints on labour already here
• Immigrants will be the sole source of population growth by 2030
• Potential output weakens through 2030
• Capital spending the strongest source of growth
• Productivity gains would help sustain GDP
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Population of Those Aged 65 and Over(per cent; share of total population)
Sources: United Nations; Statistics Canada.
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Population Growth is Waning
• Aging boomers and weak fertility rates will reduce number of births
• Deaths will increase as the numbers entering older cohorts continues to grow
• Natural rate of increase will slow dramatically over the forecast horizon
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Population Distribution by Age, 2007
Sources: The Conference Board of Canada; Statistics Canada.
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Source Population Growth(per cent change, compound annual growth)
Sources: The Conference Board of Canada; Statistics Canada.
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Population Distribution by Age, 2030
Sources: The Conference Board of Canada; Statistics Canada.
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Labor Force Participation Rate (per cent, 1985-2030)
Sources: The Conference Board of Canada; Statistics Canada.
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Labour Force Growth(per cent change, compound annual growth)
Sources: The Conference Board of Canada;
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Changing Composition of Production
• Much weaker growth in the labour force, and in employment, means that organizations will have to change their “capital-labour ratio”
• They will need to replace labour with capital (i.e. technology) to keep operating
• This will put strong upward pressure on wages, and require workers with deeper skills who can adapt quickly
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Machinery and Equipment Investment Growth
(per cent change, compound annual growth)
Sources: The Conference Board of Canada; Statistics Canada.
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Private M&E Investment (share of total GDP)
Sources: The Conference Board of Canada; Statistics Canada.
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Non-Farm Private Labour Productivity(per cent change, compound annual growth)
Sources: The Conference Board of Canada; Statistics Canada.
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Real GDP Canada (per cent change, compound annual growth)
Sources: The Conference Board of Canada; Statistics Canada.
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Replenishing the Workforce
• There are essentially three inter-related options for adapting to aging demographics:
• Invest in education: increase the skills of the workforce
• Raise levels of immigration, and speed up integration
• Encourage older workers to work longer
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Invest in Education and Skills • Canada’s education system gets an “A” in The Conference
Board’s report card on Canada, “How Canada Performs”
• But this high overall grade masks low basic skills and literacy for over 7 million Canadians
• We also under-perform at the high end – investing in educational excellence
• And education funding is being crowded out by public health care spending
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Expenditures on Public Education as a Share of GDP(per cent)
Source: OECD.
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Sources: The Conference Board of Canada; OECD.
Adult Literacy Proficiency—Proportion with Low-Level Skills
(per cent)
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Invest in Education and Skills: Priorities • Make education funding a higher priority
• Improve education levels and skills – Increase innovation in our education system – Expand international experience and language
skills – Address the skilled trades gaps – Enhance aboriginal and immigrant education
• Embrace lifelong learning– Address basic literacy and numeracy skills
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Productivity: A Conceptual Policy Framework
Skills/Human Capital
Innovation
Investment
National Operating Environment including Infrastructure
International Trade & Investment
North American Integration
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Conclusion
• Future domestic labour supply will be more scarce
• Investment in education and skills is critical
• Immigrants build workforce capacity
• Attracting and keeping older workers is a critical source of talent
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