Structural challenges

The world is constantly changing. Factors like trade conflicts, technological advances and climate change can challenge the very foundations of the economy. We study these developments to keep our economy strong and resilient.

In an increasingly interconnected and dynamic global economy, Canada faces various structural challenges that require careful analysis. These challenges are influenced not only by external factors such as geopolitics, global trade dynamics and technological advancements but also by internal factors, including demographic shifts and environmental sustainability. Understanding and addressing these structural challenges is crucial for keeping inflation low and stable, fostering growth and ensuring the economic well-being of Canadians.

Among the issues we are studying:

  • the structural factors behind Canada’s slow growth in productivity
  • how immigration and population aging impact inflation through wages, productivity and housing demand
  • how artificial intelligence will transform the demand for skills and affect productivity
  • how tariffs impact the economy and inflation in Canada
  • the impact to Canada if the US dollar ceases to be the global currency used for trade and finance

Productivity

Productivity growth is a main factor behind economic prosperity. Yet, Canada has seen slow growth in productivity for a long time. Understanding both the underlying factors behind productivity and its likely evolution are important for identifying inflationary pressures.

The four Ds: deglobalization, demographic shifts, digitalization and decarbonization

The four Ds are reshaping the Canadian economy. They may lead to more persistent pressures on inflation and cause inflation to be more volatile. For these reasons and more, examining these four structural trends is important.

  • Deglobalization is led by shifts in trade alliances and the rearranging of supply chains. It affects how Canada interacts with the global economy.
  • Demographic shifts, including population aging and immigration, influence the labour market and the demand for housing.
  • Digitalization affects productivity and the demand for skills, particularly as businesses use artificial intelligence tools more widely.
  • Decarbonization is essential to become environmentally sustainable but creates opportunities and challenges for economic growth.

The international monetary and financial system

The international monetary and financial system is the set of rules, institutions and mechanisms that govern exchange rates, cross-border flows of capital and the use of international currencies to facilitate the exchange of goods and services between countries. This system is facing heightened uncertainty and potential structural change. Geopolitical tensions, shifts in trade policies and the evolving role of the US dollar as the dominant reserve currency are key factors influencing the system. Understanding the implications of these changes for Canada is critical.

Related research

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Wages: Measurement and Key Drivers

Staff analytical note 2018-2 Dany Brouillette, Jonathan Lachaine, Benoit Vincent
Available sources of hourly wage data in Canada sometimes send conflicting signals about wage growth. This note thus has two objectives: first, we develop a wage measure—the wage-common—to better capture the (underlying) wage pressures reflecting the common trend across the available data sources. Second, we re-examine the relationship between wage growth and macro drivers (labour market slack and labour productivity).
Content Type(s): Staff research, Staff analytical notes JEL Code(s): C, C3, C38, J, J3 Research Theme(s): Models and tools, Econometric, statistical and computational methods, Monetary policy, Inflation dynamics and pressures, Structural challenges, Demographics and labour supply

Canada’s Experience with Trade Policy

Staff discussion paper 2018-1 Karyne B. Charbonneau, Daniel de Munnik, Laura Murphy
This paper compiles the contemporary view on three major Canadian-led trade policies that have marked Canada’s economic history since Confederation: the National Policy (1879), the Canada–US Agreement on Automotive Products (Auto Pact, 1965) and the Canada–US Free Trade Agreement (FTA, 1989, including its extension to the North American Free Trade Agreement, NAFTA, 1994).
Content Type(s): Staff research, Staff discussion papers JEL Code(s): F, F1, F13, N, N7, N71, N72 Research Theme(s): Structural challenges, International trade, finance and competitiveness

Capital-Goods Imports and US Growth

Staff working paper 2018-1 Michele Cavallo, Anthony Landry
Capital-goods imports have become an increasing source of growth for the U.S. economy. To understand this phenomenon, we build a neoclassical growth model with international trade in capital goods in which agents face exogenous paths of total factor and investment-specific productivity measures.
Content Type(s): Staff research, Staff working papers JEL Code(s): E, E2, F, F2, F4, O, O3, O4 Research Theme(s): Models and tools, Economic models, Monetary policy, Real economy and forecasting, Structural challenges, Digitalization and productivity, International trade, finance and competitiveness

The Evolution of Unobserved Skill Returns in the U.S.: A New Approach Using Panel Data

Staff working paper 2017-61 Lance Lochner, Youngmin Park, Youngki Shin
Economists disagree about the factors driving the substantial increase in residual wage inequality in the United States over the past few decades. To identify changes in the returns to unobserved skills, we make a novel assumption about the dynamics of skills (especially among older workers) rather than about the stability of skill distributions across cohorts, as is standard.
Content Type(s): Staff research, Staff working papers JEL Code(s): C, C2, C23, J, J2, J24, J3, J31 Research Theme(s): Models and tools, Econometric, statistical and computational methods, Monetary policy, Real economy and forecasting, Structural challenges, Demographics and labour supply

Product Sophistication and the Slowdown in Chinese Export Growth

Staff discussion paper 2017-15 Mark Kruger, Walter Steingress, Sri Thanabalasingam
Chinese real export growth decelerated considerably during the last decade. This paper argues that the slowdown largely resulted from China moving to a more sophisticated mix of exports: China produced more sophisticated goods over which it had pricing power instead of producing greater volumes of less sophisticated products.
Content Type(s): Staff research, Staff discussion papers JEL Code(s): F, F1, F14, F17, O, O1, O10 Research Theme(s): Monetary policy, Real economy and forecasting, Structural challenges, International trade, finance and competitiveness
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Disclaimer

Bank of Canada staff produce research and analysis to support the work of the Bank and to advance knowledge in the fields of economics and finance. The research is non-partisan and evidence based. All research is produced independently from the Bank’s Governing Council. The views expressed in each paper or article are solely those of the authors and may differ from official Bank of Canada views.

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