Canada’s Labour Shortage Will Be A Long-Term Challenge For The Economy

RSM Canada (“RSM”), a leading global provider of audit, tax and consulting services focused on middle market businesses, today launched its third 2022 edition of ‘The Real Economy, Canada‘ – a quarterly report that provides Canadian businesses with analysis and insights on the country’s complex economic conditions.

As governments and industries around the world grapple with inflation, rising costs and a breadth of other economic hurdles, the latest edition of The Real Economy, Canada examines how Canada’s economy is faring at the moment, and what key issues and opportunities businesses need to be aware of in the coming months.

Key findings in this quarter’s report include:

Recession talk is pre-mature, though economic headwinds are having an impact.

• The Canadian economy has bounced back strong from pandemic lockdowns, as pent-up consumer demand and government support have fueled GDP growth in every quarter since the third quarter of 2021.
• However, inflation and a rising unemployment rate, combined with persistent labour and housing shortages present elevated risk that Canada could enter a recession early next year.
• Inflation will take a while to slow despite potential summer peak, as the war in Ukraine grinds on and the labour market remains tight.
• Businesses should expect the Bank of Canada to continue raising rates for the rest of the year rather than easing them prematurely.

Canada will need to accelerate its immigration goals to address long-term labour and productivity problems.

• Declining labour force participation rates, an aging population and declining fertility rates mean that Canada must rely on immigration – rather than natural growth – to replenish the labour pool.
• Canadian policymakers are aiming to bring in more than 400,000 immigrants per year between 2022 and 2024 following the growth immigration has spurred in the millennial and Gen-Z workforce.
• Immigrants are also shown to increase productivity rates, something Canada cannot afford to ignore as labour productivity in Canada might fall to last among countries in the Organisation for Economic Co-operation and Development in just a decade.
• However, Canada must streamline the accreditation process if it wishes for skilled immigrants to fill the labour gaps that are most glaring, such as in the health care industry.

Higher interest rates have cooled Canada’s housing market, but demand remains high.

• The construction industry has been hit hard by rising interest rates and the resulting slowdown now threatens to make Canada’s housing shortage more acute.
• Rising rates, combined with inflation, threaten to put a lid on housing construction for the foreseeable future, potentially further worsening the housing affordability crisis in Canada.
• While most industries gained jobs, the construction industry lost over 23,000 in April and June, despite the red-hot labour market.
• However, the Canada Mortgage and Housing Corporation’s new mortgage loan insurance program is giving developers access to mortgages with more favourable financial terms, which incentivizes them to build more affordable housing and energy efficient housing projects.

Canada will stand to benefit from the United States’ Inflation Reduction Act and green energy transition.

• This legislative and financial commitment by Canada’s closest trading partner provides Canadian companies with some certainty as to where they can hang their hats from an economic development perspective.
• Canada’s mining and manufacturing sectors will be well-positioned to benefit as they provide the products and minerals necessary to facilitate the clean energy transition, particularly when it comes to electric vehicle development.
• Though Canada’s climate change strategy has been fairly robust, the IRA and the resulting opportunities will help provide a clearer picture of how to economically build and scale clean energy industries.

Canada’s industrial sector is reaping the benefits of strong global demand.

• The Prairie provinces have been leading the economy because of growing global demand for energy and rare metals.
• Canadian industrial production grew over five per cent year-over-year in the second quarter, well above the pre-pandemic level, and is expected to end the year on a high note.
• However, industrial production may diminish in subsequent months as global markets anticipate a recession and consumer demand slows.

“Despite a robust recovery from the lockdowns of the COVID-19 pandemic, Canadian economic growth will continue slowing down due to persistent inflation and an historically tight labour market,” says Tu Nguyen, economist and ESG director with RSM Canada. “But the real long-term challenge will be the labour shortage, with declining worker participation hitting the health care, hospitality and food services industries particularly hard.”

Nguyen continues: “There’s also a fundamental shift in the demographic of Canada’s labour force, causing policymakers to explore ambitious immigration goals to address the labour gap. But government, industry associations and organizations will actually need to go further and streamline the accreditation process so that workers educated abroad can fill much-needed roles in Canada. Only then can Canada hope to have more meaningful growth in labour supply and productivity.”