Policy and Economic Analysis Program Rotman School of Management University of Toronto Issues in the Long-Term Economic Outlook for Canada Office of the Chief Actuary Canada Pension Plan Seminar September 28, 2012 Peter Dungan and Steve Murphy
Issues in the Long-Term Outlook A. Demographics Labour Force Growth B. Labour Productivity C. Real Wage Growth D. Real Returns and Inflation E. Projections for Government and the CPP/QPP F. What Can a Post-Mortem from a Long-Term Outlook of 1992 Tell Us?
Some Background: The Policy and Economic Analysis Program (PEAP) at the University of Toronto has been developing longer-term projections for the Canadian and Ontario economies since the late 1970s. At present these are developed/revised quarterly a year (and published twice a year) with a horizon to 2040. Projections are based on 1) A demographic model 2) A macro-econometric model 3) (Much) judgment and external analysis
A. Demographics Labour-Force Growth 1) Issues in the Demographic Projection. Fertility important to examine the generational shift in desired age of child bearing Total Period Fertility (TPF) could still rise over next decade or two. Mortality mortality reductions of last several decades may be starting to lessen but more may be living past 100. Immigration will the.75% target be maintained and when, if ever, will it drop? How productive will new immigrants be relative to settled population?
.14.12 Birth Rates by Age for Selected Years 2020 + 2040.10.08.06.04 1992 2010 2040.02.00 15 20 25 30 35 40 45
2.0 TPF and Crude Birth Rate 1.8 1.6 TPF 1.4 1.2 Crude Birth Rate 1.0 95 00 05 10 15 20 25 30 35 40
Total Period Fertility and Crude Birth Rates in Selected Years: TPF Crude Birth Rate 2011 1.69 1.12 2015 1.75 1.18 2020 1.83 1.22 2030 1.90 1.14
12 10 Death Rates by 10-Yr Groups (%) M80-89 8 6 F80-89 4 M70-79 2 F70-79 M60-69 0 F60-69 95 00 05 10 15 20 25 30 35 40 45 Death Rates by 10-Yr Groups (%) 40 35 F100+ 30 M100+ 25 M90-99 20 15 F90-99 10 05 10 15 20 25 30 35 40
1.0 0.8 Immigration/Emigration - % of Population Immigration 0.6 0.4 0.2 Emigration 0.0 Returning Canadians 95 00 05 10 15 20 25 30 35 40
80,000,000 Total Population - PEAP Projections - Long-Term 70,000,000 2011 60,000,000 2012 2010 2009 50,000,000 2008 2006 40,000,000 30,000,000 20,000,000 00 10 20 30 40 50 60 70 80 90 00 Population projections in the very long term can vary significantly with alternative data and assumptions
Immigration, Emigration and Returning Canadians as Per Cent of Population in 2040: Immigrants: 0.75 % Emigrants: 0.14 % Returning Canadians 0.07%
A. Demographics Labour-Force Growth 2) Labour-Force Participation. Clearly, 55-64 and 65+ cohorts will increase participation in next decade or two; OAS changes will further encourage higher part rate.. But how high? presumably bounded by the part rate of the next lower cohort and by history.. 65+ cohort part rate will drop when boomers reach well into their 70s and their low part rate reduces the average of the cohort.
Percent 100 Participation Rates By Age Group and Gender 90 80 70 Female - 20 to 24 Female - 25 to 54 60 Total - Male and Female 50 40 30 Female - 15 to 19 Female - 55 to 64 20 10 Female - 65 & over 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Percent 100 90 80 70 60 Total - Male and Female Participation Rates By Age Group and Gender Male - 55 to 64 Male - 25 to 54 Male - 20 to 24 50 40 Male - 15 to 19 30 20 10 Male - 65 & over 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Participation Rates by Age and Gender: Age: Male (%) Female (%) 2013 2020 2030 2040 2013 2020 2030 2040 15-19 50.4 52.4 52.4 52.4 52.5 54.0 54.0 54.0 20-24 78.7 80.0 80.0 80.0 74.9 76.2 76.2 76.2 25-54 91.1 91.9 91.9 91.9 82.8 82.9 82.9 82.9 55-64 69.6 72.4 73.4 73.5 59.3 64.1 65.4 65.5 65+ 17.4 18.8 19.5 15.5 9.1 10.8 11.5 7.5 Total 66.8 66.2 63.5 61.9 Male + Female
A. Demographics Labour-Force Growth 3) Labour-Force Full-Employment Unemployment Rate (or NAIRU). Long-run NAIRU is projected to be about 6.0%, but our forecast uses 6.2% allowing for some labourmarket slack.. The actual level of the NAIRU has relatively little impact on the long-term GDP growth rate.
B. Labour Productivity Labour productivity growth together with employment at full employment drives long-run GDP projection but productivity is far more difficult to project The term we use is GDP / employee hours data in our view need a bit of caution. Some history for growth in GDP/Employed: 1962 2011 1.25% 1962 2000 1.47% 2001 2011 0.47% Projection: 2012 2040 1.45%
5 GDP / Employee - Growth Rate History and Projected 4 3 2 1 0-1 -2 65 70 75 80 85 90 95 00 05 10 15 20 25 30 35 40
B. Labour Productivity Real Wage Growth Why could labour productivity rebound to earlier growth rates in the coming decades?. Ageing, more-experienced and better-educated work force.. Labour markets tighter on average more incentive to economize on labour. Higher capital accumulation tax environment more conducive to investment attraction of Canada for foreign investment. While natural resource productivity falls with resources that are more difficult to extract, natural resources are more valuable this should be captured by Chain-Fisher inflation adjustment. Catch-up with US
5 4 3 GDP / Employee Canada and US US Canada 2 1 0-1 -2-3 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
B. Labour Productivity Why could labour productivity NOT rebound to earlier growth rates in the coming decades?. Loss of experienced baby-boom cohort even if they retire later. Greater reliance on immigration to add to labour force, and they are not as productive due to difficulties of integration into labour market. Significant capital devoted to GHG or other environmental cleanup, leaving less to increase GDP as currently measured hence lower apparent productivity. Some of the US productivity growth may be only statistical due to use of hedonic pricing, especially in IT sector
Expenditure Shares of Nominal GDP Percent 60 50 Consumption Exports 40 Imports 30 Government 20 10 Investment 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
B. Labour Productivity Using a production function approach with the customary weights (70% labour, 30% capital) we can see the contribution of capital accumulation to growth in the projection. The implicit growth in Total Factor Productivity (TFP) is well within historical ranges (0.5% - 1.0%)
Percent 7 Components of Potential Growth (Unweighted) 6 5 Capital 4 3 2 1 Labour 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Percent Potential and Projected Growth 8 6 Potential GDP Growth with: 4 TFP = 1.0% 2 TFP = 0.5% 0-2 Actual/Projected GDP Growth -4 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
C. Real Wage Growth The term we use is Wages, Salaries and Supplementary Labour Income per Employed person for compatibility with National Accounts concepts. Real Wage Growth largely follows labour productivity
C. Real Wage Growth But we have some real wage growth in excess of productivity growth over the next 20 years. Some catch-up as return to full employment. Some extra bargaining power of labour due to boomer retirements some skills become more scarce However there is no force returning labour s share of GDP to some long-term or underlying value Also the effect of boomer retirements works to reduce the average wage as in progress-through-the-ranks establishments a large number of the higher-paid employed steadily leave the mix.
Percent 6 Real Wage Gains and Productivity Growth 5 4 3 Productivity 2 1 0-1 -2-3 Real Wage -4 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Percent 20 Income Shares of GDP Wages and Salaries (RHS Axis) Percent 56 16 52 12 Corporate Profits (Before Tax) Indirect Taxes 48 8 44 4 Interest & Misc. Investment Income 40 0 36 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
D. Real Rates We project real rates (Canada and world) to rise relatively quickly once full recovery is closer;. Central banks will be aggressive in trying to cut off the next bubble. Long-run level is above that of recent decade, lower than in the late-80s/early-90s and in the range of the 1960s.
10 Real Yield on Gov't of Canada 10 Yr and Over Bonds (CPI Inflation Rate) 8 6 4 2 0-2 -4 65 70 75 80 85 90 95 00 05 10 15 20 25 30 35 40
Percent Inflation (CPI) and Unemployment 14 12 10 8 6 Unemployment Rate 4 2 Inflation (CPI) 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Long-run inflation projection is Bank s 2% target to be maintained with just under 2% achieved on average.
D. Real Rates Why the generally high real rate? again this is largely a world phenomenon not Canada-specific Demand for long-term loanable funds is high:. Strong investment by emerging economies (perhaps no higher in China but stronger elsewhere). High demand from many governments in deficit Supply of loanable funds is lower:. East Asian savings lower China, ageing, transition to greater consumption. Ageing population in developed lower saving
E. Projections for Governments and the CPP/QPP We project the government sector as a whole to return to rough balance on a National Accounts basis by a bit before 2020. The National Accounts portrayal of the CPP/QPP is incomplete in some respects but the projection using this basis shows the joint plan is sustainable with current contribution and payout rates.
Percent 80 Federal Debt as a Share of GDP 70 60 50 40 30 20 10 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Percent 30 Provincial Debt as a Share of GDP 25 20 15 10 5 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Percent 100 Government Debt as a Share of GDP 90 80 70 60 Total 50 40 Federal 30 20 10 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Percent 4 CPP/QPP Plans as a Share of GDP Revenues 3 Expenditures 2 1 Balance 0-1 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Percent 4 CPP/QPP Revenues as a Share of GDP Total Revenues 3 Premium Revenues 2 1 Investment Revenues 0-1 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Percent 8 6 Net Saving Shares as a Percent of GDP Net Domestic Saving (S-I) 4 2 Net Foreign Saving (M-X) 0-2 -4-6 -8 Net Government Saving (T-G) -10 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 While government is balanced, foreign borrowing finances investment beyond domestic saving.
F. Post-Mortem on a 1992 Long-Term Projection Compare history for 1992-2011 with a projection we prepared in August, 1992.
6 5 Real GDP Growth Rate 1992 Forecast and Actual 1992 Forecast 4 3 2 1 Actual 0-1 -2-3 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
1,500 Real GDP ($ 2002 Bill) 1992 Forecast and Actual 1,400 1,300 1,200 1992 Forecast 1,100 Actual 1,000 900 800 1992 forecast growth applied to 1991 actual 92 94 96 98 00 02 04 06 08 10
19,000 Labour Force ('000) 1992 Forecast and Actual 18,000 17,000 1992 Forecast 16,000 Actual 15,000 14,000 1992 forecast growth applied to 1991 actual 92 94 96 98 00 02 04 06 08 10
18,000 Employment ('000) 1992 Forecast and Actual 17,000 16,000 15,000 1992 Forecast Actual 14,000 13,000 12,000 1992 forecast growth applied to 1991 actual 92 94 96 98 00 02 04 06 08 10
90 GDP/Employee ($2002 '000) 1992 Forecast and Actual 85 80 75 1992 Forecast Actual 70 65 60 92 94 96 98 00 02 04 06 08 10
4 Real Wage Growth Rate 1992 Forecast and Actual 3 2 1 1992 Forecast 0 Actual -1-2 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
70 Federal Debt/GDP Ratios: 1992 Forecast and Actual 60 Actual 50 1992 Forecast 40 30 20 10 1992 forecast used different federal debt (and GDP) definitions 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
10 Real Industrial Bond Rates: 1992 Forecast and Actual 9 8 Actual 7 6 5 1992 Forecast 4 3 2 MYW Industrial Bond Rate minus CPI Inflation Rate 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
5 CPI Inflation Rate 1992 Forecast and Actual 4 1992 Forecast 3 2 1 Actual 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
F. Post-Mortem on a 1992 Long-Term Projection Some possible lessons?. Some comfort in getting general trends correct. The Canadian productivity slowdown after 2000 is a definite surprise as are low real rates. Should long-term projections include at least one major recession? Is this better than using average growth rates deemed to be prudent?. The Bank of Canada means what it says.