Canada's Potential Growth: Another Victim of the Crisis?
29 Pages Posted: 8 Apr 2011
Date Written: January 1, 2010
This study investigates the impact of the current financial crisis on Canada's potential GDP growth. Using a simple accounting framework to decompose trend GDP growth into changes in capital, labor services and total factor productivity, we find a sizeable drop in Canadian potential growth in the short term. The estimated decline of about 1 percentage point originates from a sharply decelerating capital stock accumulation (as investment has dropped steeply) and a rising long-term unemployment rate (which would raise equilibrium unemployment rates). However, over the medium term, we expect Canada's potential GDP growth to gradually rise to around 2 percent, below the pre-crisis growth rate, mostly reflecting the effects of population aging and a secular decline in average working hours.
Keywords: Canada, potential growth, TFP, financial crisis, labor productivity
JEL Classification: G01, D24, J24, O51, O16, O4
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