By Stephen Johnston
November 21, 2024
Excerpt from article:
As Canada confronts the dual challenges of high inflation and low growth, the specter of stagflation looms large. Stagflation, which refers to below-trend economic growth combined with above-trend inflation, erodes real GDP per capita and poses significant challenges for investors. The current macroeconomic and regulatory environment in Canada has hindered capital formation, and without increased capital generation, sustained improvements in the standard of living are unlikely to materialize.
At its core, the issue is one of savings and capital. Capital formation is the backbone of economic growth and ultimately depends on the size of the pool of savings. Unfortunately, Canadians exhibit relatively low savings rates and this is exacerbated by a propensity to allocate what limited savings they have or even worse borrowed funds towards consumption rather than productivity-enhancing investments. In short, Canadians consume more than they produce, which in turn leads to declining capital formation and poor labor productivity. Canadian labor productivity investments, for instance, are nearly half of what is seen in the United States, creating a growing gap that continues to impede the country’s economic growth.
Even though it is difficult to precisely forecast the duration or severity of Canada’s current trends, investors would be wise to have some doubt that Canada’s stagnation will end quickly. As Goethe wisely noted, “Doubt grows with knowledge.” We must approach the issue with a forward-looking investment strategy, considering the limitations of past approaches. The economic conditions that fueled growth and returns over the last two decades are unlikely to deliver similar results in a higher inflation, lower growth environment.