Canadian Occupational Projection System (COPS)

Macroeconomic Scenario (2017-2026)

The occupational projections prepared under the Canadian Occupational Projection System (COPS) require the production of a macroeconomic scenario to determine the future long-term trends in overall employment growth and in the distribution of employment across industries and occupations.

This document presents the macroeconomic scenario that underlies the 2017 COPS projections. This scenario was developed in collaboration with the Conference Board of Canada based on information available as of Spring 2017.

The future long-term trends in Canada’s economic growth will be heavily influenced by demographic developments, namely slower population growth and population aging. Such demographic changes, which cannot be avoided, are projected to have a major influence in the long-term evolution of Canada's labour force, employment, and economic potential.

Demographics, Labour Force, and Potential GDP

Figure 1 presents growth in the Canadian population of working age over the period 1977-1986, 1987-1996, 1997-2006, 2007-2016 and 2017-2026. It shows that the pace of growth in the working-age population (15 and over) is projected to slow significantly over the period 2017-2026, particularly among those aged 15-64.

Figure 1: Growth in Canadian Population of Working Age

Bar figure showing the growth in Canadian population of working age over the periods 1977-1986, 1987-1996, 1997-2006, 2007-2016 and 2017-2026. The data is shown on the table following this figure

Source: Statistics Canada (historical data and projections). The shaded area represents projections.

Text version of Figure 1: Growth in Canadian Population of Working Age

According to the projection, growth in population aged 15 and over is projected to average 1.0% annually, down from 1.3% over the period 2007-2016. This slowdown reflects a decline in the natural increase of the population (births minus deaths) attributable to a low fertility rate and a rise in deaths due to population aging. The projected increase in life expectancy and in the number of immigrants will not be enough to offset the growth deceleration of the working-age population.

The slowdown is projected to be even more pronounced for those aged 15-64 due to the aging of baby-boomers (born between 1946 and 1965) who have started turning 65 in 2011. As baby-boomers represent Canada’s largest generation in history, this will reduce population growth by almost two-thirds in the 15-64 age group over the projection period (annual average of 0.3% versus 0.8% in the previous ten years).

Figure 2 presents the percentage distribution of the working-age population by age group in 1976, 1986, 1996, 2006, 2016 and 2026. It shows that, as a result of population aging, people in the older age groups will account for an increasing share of the working-age population.

Figure 2: Distribution of the Working-Age Population by Age Group

Bar figure showing the percentage distribution of the working-age population by age group in 1976, 1986, 1996, 2006, 2016 and 2026. The data is shown on the table following this figure

Source: Statistics Canada (historical data and projections). The shaded area represents projections.

Text version of Figure 2: Distribution of the Working-Age Population by Age Group

All baby-boomers will be entering in the 55-64 or 65+ age groups over the projection period, boosting population growth in the older age groups relative to the younger age groups.

As a result, the older age groups will account for an increasing share of the working-age population. By 2026, those aged 55-64 and 65+ are projected to represent 15% and 25% of the working-age population, respectively. This means that 40% of the labour force source population will be aged 55 and over by 2026, compared to 36% in 2016 and 30% in 2006.

Figure 3 presents the labour force participation rates by age group from 1976 to 2026. It shows that participation rates are projected to edge up in most age groups over the period 2017-2026, with the largest increase among the 55-64 years old.

Figure 3: Labour Force Participation Rates by Age Group

Line figure showing the labour Force participation rates (in percentage) by age group over the period 1976-2026. The data is shown on the table following this figure

Sources: Statistics Canada (historical) and ESDC 2017 COPS macroeconomic scenario (projections). The shaded area represents projections.

Text version of Figure 3: Labour Force Participation Rates by Age Group

Labour market attachment is also projected to increase among those aged 25-54, albeit to a lesser extent than their older counterparts, partly reflecting a levelling out of women’s participation rate in the prime age group and slower growth in the average level of education.

After having been negatively affected by the 2008-2009 recession, the participation rate in the 15-24 age group straightened modestly starting in 2013-2014, reflecting more favourable labour market conditions for youths as the residual effects of the recession gradually disappeared. While the participation rate in this age group is projected to increase somewhat further over the short-term, labour market attachment among youths is expected to remain essentially stagnant after 2017, partly due to the rising trend in post-secondary school enrollment and the levelling off in the share of students in the labour force.

In the older age groups of 55-64 and 65+, the participation rates are expected to continue to increase as new cohorts tend to retire at a later age than previous cohorts, party because they are more educated and in better health. The pace of increase in their participation rates is, however, projected to slow with the gradual fading of intergenerational differences.

Figure 4 presents the labour force participation rates of people aged 15 and over as well as of those aged 15 to 64, from 1976 to 2026. It shows that despite the small increases projected in the participation rate among most age groups, the overall participation rate of the population aged 15 and over is expected to decline during the period 2017-2026 as a result of population aging.

Figure 4: Overall Labour Force Participation Rate (15+ and 15-64)

Line figure showing the overall labour force participation rate (in percentage) of population aged 15 and over and 15-64, over the period 1976-2026. The data is shown on the table following this figure

Sources: Statistics Canada (historical) and ESDC 2017 COPS macroeconomic scenario (projections). The shaded area represents projections.

Text version of Figure 4: Overall Labour Force Participation Rate (15+ and 15-64)

Indeed, the shift in the age composition of the working-age population towards the lower attachment group of 65+ is projected to push down the overall participation rate by 1.5 percentage points, from 65.7% in 2016 to 64.2% in 2026 (the proportion of people with low participation rates will increase while the proportion of people with high participation rates will decrease, lowering the average participation rate in the working-age population of 15+).

In contrast, the participation rate for those aged 15-64 is expected to keep increasing over the projection period, up by 2.2 percentage points, from 78.1% in 2016 to 80.3% in 2026. While labour force participation is also expected to increase somewhat among those aged 65+, their participation rate will remain much lower relative to the other age groups, standing at 14.6% by 2026 (see Figure 3).

Figure 5 presents the levels and the pace of growth in total labour force from 1978 to 2026. It shows that the slower growth projected in the working-age population over the period 2017-2026, combined with a decline in the overall participation rate, will lead to a period of much slower labour force growth relative to previous decades.

Figure 5: Total Labour Force

Figure showing the total labour force and its annual average percentage growth over the period 1978-2026. The data is shown on the table following this figure

The number of people in the labour force is the product of the working-age population and the overall participation rate:
(Labour Force 15+ = Population 15+ x Participation Rate 15+)

Sources: Statistics Canada (historical) and ESDC 2017 COPS. The shaded area represents projections.

Text version of Figure 5: Total Labour Force

Indeed, while the number of people entering the labour market will continue to exceed the number of people leaving the labour force, the gap is projected to shrink over the projection period, largely due to the massive retirements of baby-boomers. As a result, labour force growth is projected to average 0.8% annually over the period 2017-2026, down from 1.1% in the previous ten years.

Figure 6 presents the evolution of real and potential GDP from 1982 to 2026. It shows that the Canadian economy is expected to gradually close the output gap and return to potential GDP by 2018.

Figure 6: Real and Potential GDP

Figure showing the real and potential GDP in billions of dollars over the period 1982-2026. The data is shown on the table following this figure

Source: Statistics Canada (historical) and ESDC 2017 COPS macroeconomic scenario (projections). The shaded area represents projections.

Text version of Figure 6: Real and Potential GDP

In the long-term, aggregate demand is determined by potential GDP, which is the level of activity the economy can reach when all factors of production are fully and efficiently utilized. Potential output is a function of the size of the labour force, the level of fixed capital, and total factor productivity.

Over the period 2003-2007, growth in aggregate demand outpaced growth in potential output, creating some pressures in the labour market and lowering the unemployment rate significantly. Thereafter, the economy went into recession and aggregate demand fell below potential output, leading to a negative output gap.

Growth in aggregate demand is projected to exceed growth in potential output over the short-term, allowing the Canadian economy to gradually close the output gap and return to potential GDP by 2018. Thereafter, aggregate demand moves in line with potential GDP.

Figure 7 presents the pace of growth in employment and in the labour force from 2000 to 2026. It shows that employment growth will become increasingly constrained by labour force growth over the projection period.

Figure 7: Growth in Employment and Labour Force

Bar figure showing the annual average percentage growth of employment and labour force over the period 2000-2026. The data is shown on the table following this figure

Sources: Statistics Canada (historical) and ESDC 2017 COPS macroeconomic scenario (projections). The shaded area represents projections.

Text version of Figure 7: Growth in Employment and Labour Force

The gradual closure of the output gap will increase the demand for labour, allowing employment to grow in line with labour force growth and the unemployment rate to return to pre-recession levels.

Indeed, in the short- to medium-term, employment growth is projected to exceed labour force growth, pushing down the unemployment rate.

Over the longer term, however, employment growth will become increasingly constrained by slower growth in the labour force and by a return of the unemployment rate close to the levels observed prior to the recession of 2008-2009.

As a result, employment growth is projected to average 0.9% annually over the period 2017-2026, down from 1.0% in the previous ten years.

External and Domestic Drivers of Aggregate Demand

Figure 8 presents the pace of growth in U.S. real GDP from 1982 to 2026. It shows that economic growth in the U.S. is projected to accelerate over the forecast period, although demographic changes will restrain the pace of growth.

Figure 8: U.S. Real GDP Growth

Bar figure showing the U.S. real GDP annual average percentage growth over the period 1982-2026. The data is shown on the table following this figure

Sources: Statistics Canada (historical) and ESDC 2017 COPS macroeconomic scenario (projections). The shaded area represents projections.

Text version of Figure 8: U.S. Real GDP Growth

The average pace of growth recorded in the U.S. real GDP over the period 2007-2016 was significantly lowered by the 2008-2009 recession. Economic growth is projected to accelerate over the period 2017-2026, particularly in the short-term, driven by faster growth in consumption and investment spending. Solid labour market conditions, rising wages, relatively low interest rates and better household financial positions are expected to support consumer expenditures and residential investment. With a U.S. economy close to full employment and softer conditions needed to qualify for a mortgage, more first-time homebuyers will enter the housing market, while rising home prices will encourage construction activity and increase homeowners’ equity to finance current expenditures.

Business investment in non-residential structures and equipment are also expected to boost U.S. economic growth over the short-term, supported by rising capacity utilization, improved business confidence, growing demand for goods and services, and a rebound in energy-related investment as a result of the gradual recovery anticipated in oil prices. Increases in interest rates are expected to be moderate and should not prevent firms from investing. However, net exports will continue to subtract from U.S. real GDP growth, with growth in imports exceeding growth in exports, largely due to the high value of the U.S. currency.

Over the medium- to long-term, the impacts of demographic changes on domestic demand and potential output are expected to intensify, restraining economic growth in the United States. Indeed, growth in the labour force will gradually weaken due to slower growth in the working-age population and massive retirements of baby-boomers.

The most important impact on aggregate demand should be felt on household consumption and residential investment. The pace of growth in household consumption is projected to weaken as an increasing number of people will be entering their high-savings pre-retirement years. At the same time, slower population growth should lead to a gradual decline in the pace of household formation, and therefore, weaker increases in residential investment. Demographic changes are also expected to put pressures on public finances, limiting the capacity of the U.S. federal government to stimulate economic growth.

Figure 9 presents the evolution of the Canada-U.S. exchange rate and world oil prices from 1978 to 2026. It shows that since the early 2000s, the movement in the value of the Canadian dollar against the U.S dollar largely reflected fluctuations in world prices for commodities, particularly oil prices.

Figure 9: Canada-U.S. Exchange Rate and World Oil Prices

Line figure showing the Canada-U.S. exchange rate and world oil prices over the 1978-2026 period, in U.S. cents. The data is shown on the table following this figure

Sources: Statistics Canada (historical) and ESDC 2017 COPS macroeconomic scenario (projections). The shaded area represents projections.

Text version of Figure 9: Canada-U.S. Exchange Rate and World Oil Prices

The rapid decline in world oil prices during the second half of 2014 has resulted in a steep depreciation of the Canadian dollar relative to the U.S. dollar. Oil prices reached a bottom in early 2016 and have since somewhat recovered, but excess supply continues to constrain prices. The decision by the Bank of Canada to increase its target for the overnight rate for the first time in nearly seven years in mid-2017 has contributed to support the Canadian dollar.

With the gradual strengthening in global demand, world oil prices are expected to recover progressively over the projection period. This factor, combined with additional increases in interest rates as a result of improved economic and labour market conditions, should lead to a modest appreciation of the Canadian dollar which is expected to reach around 0.81 U.S. dollar by 2026.

On average, the projected value of the Canadian dollar for the period 2017-2026 remains significantly below the value recorded in the previous ten years (0.78 versus 0.92 U.S. dollar).

Figure 10 presents the evolution of Canada’s government spending as a share of total real GDP from 1992 to 2026. It shows that increasing pressures on public finances are expected to restrain growth in government spending over the period 2017-2026.

Figure 10: Canada’s Government Spending as a Share of Total Real GDP

Bar figure showing Canada’s Government spending as a share of total real GDP, including government expenditures and investments over the period 1992-2026. The data is shown on the table following this figure

Sources: Statistics Canada (historical) and ESDC 2017 COPS macroeconomic scenario (projections). The shaded area represents projections.

Text version of Figure 10: Canada’s Government Spending as a Share of Total Real GDP

After increasing rapidly in 2009 and 2010 due to the implementation of large stimulus packages to combat the recession, the share of government spending in total GDP fell back from 2011 to 2014, reflecting the federal and provincial governments’ decision to curtail growth in program spending in an attempt to return to fiscal balance.

With the federal and many provincial governments committed to increase infrastructure spending, public investment will grow markedly in 2017, posting its largest gain since the 2009-2010 stimulus package. This factor, combined with solid increases in government expenditures on goods and services, will increase the share of overall government spending in total GDP for a third consecutive year. However, starting in 2018, this ratio is expected to decline gradually as a result of deficit reduction efforts, especially at the provincial level, restraining the impact of the public sector on economic growth.

Over the longer term, demographic changes will constrain employment and real GDP growth in Canada, which in turn will reduce growth in government revenues, thus limiting the capacity of governments to increase expenditures.

Composition of Growth in Aggregate Demand

Figure 11 presents growth in real GDP, final domestic demand and exports over the periods 2007-2016 and 2017-2026. It shows that the modest acceleration projected in Canada’s real GDP growth over the period 2017-2026 is expected to be driven by a notable improvement in exports growth, as the pace of growth in final domestic demand is expected to weaken.

Figure 11: Growth in Real GDP, Final Domestic Demand and Exports

Bar figure showing the annual average percentage growth of real GDP, final domestic demand and exports over the periods 2007-2016 and 2017-2026. The data is shown on the table following this figure

Sources: Statistics Canada (historical) and ESDC 2017 COPS macroeconomic scenario (projections).

Text version of Figure 11: Growth in Real GDP, Final Domestic Demand and Exports

Exports

The average pace of growth recorded in Canadian exports over the period 2007-2016 was substantially lowered by the weakness in foreign demand brought by the global recession of 2008-2009. Exports are expected to increase at a much faster pace over the 2017-2026 horizon, primarily supported by the strength in consumer spending, residential activity and business investment in the United States. The majority of Canada’s exporters are also expected to benefit from the relatively low value of the Canadian dollar, making Canadian exports more competitive on international markets. However, in the short-term, most of the gains are projected to come from the energy sector, as non-energy export growth should remain modest.

While solid economic growth in the United States is expected to be the primary source of foreign demand, the recent signing of the Comprehensive Economic Trade Agreement (CETA) with the European Union is also a positive development for Canadian exports. However, the NAFTA renegotiation and the probability that greater protectionist measures will be put in place in the United States over the coming years represent a significant downside risk to the export outlook. Despite this risk, export growth is projected to accelerate and outpace overall economic growth over the next ten years.

Final Domestic Demand

The pace of growth in final domestic demand is projected to weaken over the period 2017-2026, as changing demographics is expected to restrain growth in consumer spending and residential investment and put additional pressures on public finance. However, growth in business investment in non-residential structures and machinery and equipment (M&E) is projected to improve significantly, driven by a gradual recovery in energy investment and the need to upgrade existing M&E in response to rapid technological innovations and slower growth in labour supply.

Figure 12 presents growth in major components of real final domestic demand over the periods 2007-2016 and 2017-2026. It shows that three of the five components of final domestic demand are projected to grow at a slower pace over the period 2017-2026, lowering growth in overall final domestic demand relative to the period 2007-2016.

Figure 12: Growth in Major Components of Real Final Domestic Demand

Bar figure showing the annual average percentage growth in major components of real final domestic demand (average annual growth, in percentage) over the periods 2007-2016 and 2017-2026. The data is shown on the table following this figure

Note: Includes government investment in residential and non-residential structures (i.e. engineering structures and building construction).

Sources: Statistics Canada (historical) and ESDC 2017 COPS macroeconomic scenario (projections).

Text version of Figure 12: Growth in Major Components of Real Final Domestic Demand

Weaker growth anticipated in consumer spending is primarily attributable to demographic changes. Slower growth in the working-age population (15 years and over) is expected to constrain employment growth, while the aging of the population will result in massive retirements of baby-boomers from the labour market. These two factors are expected to restrain growth in disposable income and, as a result, growth in consumer spending. High household debt levels and the gradual increase anticipated in interest rates are also expected to weigh on consumer spending, particularly for big-ticket items. Consumption growth is projected to slow for most categories of goods and services.

Growth in residential investment is also projected to weaken. With the gradual decline in household formation and further increase in interest/mortgage rates, investment in new housing is expected to start contracting in 2018, resulting in negative growth for the overall projection period. Ownership transfer costs (associated with the resale of existing houses) are also expected to post negative growth. In contrast, the pace of growth in renovation spending is expected to accelerate, making this sub-component the only source of growth in residential investment over the period 2017-2026. Beyond 2020, renovation spending is projected to exceed new housing spending.

Deficit reduction efforts, particularly in the provinces, and additional pressures on public finances due to demographic changes are expected to restrain growth in government expenditures and investment over the projection period. After a temporary boost in 2017, as federal and many provincial governments committed to increase infrastructure spending, growth in public sector spending is expected to slow progressively as governments, especially at the provincial level, will need to improve their fiscal positions.

Between 2014 and 2016, non-residential investment fell by 25%, almost entirely attributable to the severe investment cutbacks in oil and gas engineering structures. This significantly restrained growth in non-residential investment during the 2007-2016 period. With the gradual recovery anticipated in crude oil prices and positive announcements concerning pipeline projects, investment in oil and gas engineering structures is expected to pick up progressively. Stronger increases in non-residential building construction (commercial, industrial, institutional) will also contribute to the faster pace of growth projected in non-residential investment over the period 2017-2026.

Investment in machinery and equipment (M&E) is projected to record the strongest growth among all the components of final domestic demand over the period 2017-2026. The gradual recovery in energy investment, renewed growth in manufacturing activity, and the need to upgrade existing M&E and boost productivity are expected to foster capital investment over the medium- to long-term. New technologies and the notable slowdown projected in labour force growth (labour supply) will also represent an incentive for businesses to invest more in physical capital.

Figure 13 presents the evolution of real net exports as a percentage of total real GDP from 1982 to 2026. It shows that net exports are expected to improve gradually over the projection period, contributing to the increase in Canada's economic activity.

Figure 13: Real Net Exports

Figure showing the real net exports as a percentage of total real GDP over the period 1982-2026. The data is shown on the table following this figure

Source: Statistics Canada (historical) and ESDC 2017 COPS macroeconomic scenario (projections). The shaded area represents projections.

Text version of Figure 13: Real Net Exports over the period 1982-2026

As growth in real exports is projected to exceed growth in real imports, Canada’s trade balance is expected to improve over the projection period, contributing positively to the increase in overall economic activity. The trade deficit turned into a surplus in 2016, and this surplus is projected to keep growing, reaching 2.4% of total real GDP in 2026.

The projected improvement in net exports is primarily attributable to a competitive Canadian dollar and stronger growth in foreign demand, particularly from the United States, which should allow the export sector to post faster gains over the period 2017-2026 (see Figure 11). However, the short-term outlook is subject to significant uncertainty with regards to trade liberalization due to NAFTA renegotiations, trade restrictions faced by the agriculture and wood product sectors, and the opposition of the current U.S. administration to the Trans-Pacific Partnership (TPP) agreement. Moreover, the long-term outlook for exports will be constrained by the slowdown anticipated in U.S. economic growth, as demographic changes are expected to restrain the pace of growth in domestic demand and potential output in Canada’s largest trading partner (see Figure 8).

Imports are also expected to post faster gains over the period 2017-2026. The significant strengthening projected in business investment, particularly in machinery and equipment, is expected to spur Canadian imports in the short-term. Over the longer term, growth in imports will be constrained by the relatively low value of the Canadian dollar and the weaker pace of growth anticipated in final domestic demand, more particularly in high import propensity consumer spending. With population aging, Canadians are expected to consume more services and slightly fewer goods. Since services tend to have a lower import content, this change in consumer demand is expected to restrain import activity.

Changes in external and domestic drivers of aggregate demand are projected to lead to changes in the pace of growth of industrial output and employment, which in turn affect occupational labour demand over the period 2017-2026. See the Industrial Scenario (2017-2026) for more information.

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