04/03/2024
Canada problem in a nut shell can be explained by the capital/output ratio.
Canada now has to invest almost 37% of GDP to generate a single % of GDP. This is a large function of inefficiency. 5x higher to maintain same economic growth rate (from the late 70s), and 2x to maintain same growth rate from 2000.
More technical breakdown:
This tests how much needs to be invested to generate a dollars worth of GDP. ICOR measures how much must be invested as a % of GDP to generate one percent growth in GDP.
Thus a high ICOR value means that the inefficiency to generate 1% growth in annual GDP. When we look prior and shortly after to the GFC ICOR had stagnated which was somewhat a positive development.
It is better for stagnation relative increasing ICOR. The fact that ICOR has rose by almost 5x in Canada is a serious negative development meaning Canada has to invest 5x more as a percent of GDP to maintain same economic growth rate it had in the late 70s.
Or if we look from 2000s Canada has to invest almost 2x to maintain same level of economic growth. The fact that we have not seen a reduction in ICOR since the 70s means there needs to be a huge policy overhaul. As well as a look at the overall aspect of institutional quality in Canada.
Excerpts : Deer Point Macro
