DeepDives is a bi-weekly essay series exploring key issues related to the economy. The goal of the series is to provide Hub readers with original analysis of the economic trends and ideas that are shaping this high-stakes moment for Canadian productivity, prosperity, and economic well-being. The series features the writing of leading academics, area experts, and policy practitioners. The DeepDives series is made possible thanks to the ongoing support of Centre for Civic Engagement.

The burning issue right now in Canada is the cost of living—and it’s not going away anytime soon. Despite the inflation rate slowing to 2.9 percent in March, Canadians remain anxious, and recent polls show that sentiment is only worsening.

A big reason for Canadians’ discontent is that while inflation (year-over-year price growth) may have slowed, price levels are still far higher than in mid-2021 when they first began to take off. Between March 2021 and March 2024, food prices, for instance, have risen overall by a crushing 21 percent. Shelter is similarly up by 20 percent. There’s no sign that either will retreat to lower levels anytime soon (see Table 1).^{1This DeepDive was written prior to last week’s release of Statistics Canada’s April CPI data. As such, the data in this table are reflective of March 2024.}

If policymakers want to address price levels themselves, it prompts the question: what can they do about them? 

The problem, like so many in economics, is that there is never one cause. Any pro-affordability agenda needs to address the different factors that have contributed to higher prices and rising costs for Canadians. 

There are five forces that have driven inflation in Canada and around the world:

1. Supply chain constraints and geopolitics
2. Monetary policy
3. Fiscal policy;
4. Firm behaviour and competition
5. Housing

This DeepDive aims to outline various causes of Canadian price inflation and offer some substantive ideas as to what governments can do to make the lives of Canadians more affordable. 

1. Supply chain constraints and geopolitics kickstarted it all

When we think about causes of inflation, the usual suspects have been around for many years— corporate greed, ultra-low interest rates, and too much federal spending—but notwithstanding the presence of these different factors, inflation remained low for more than a decade. Research from the U.S. Federal Reserve shows that what really kicked off the recent spike in inflation was the unprecedented supply chain disruptions from COVID-19. Factory closures, transportation delays, and labour shortages all reduced supply for many products and drove up production costs as a result. At the same time, the Russian invasion of Ukraine drove energy, fertilizer, and global commodity prices upwards causing a 1.2 percent increase in Canada’s inflation.

The greatest inflationary effects accumulated while much of the economy was shuttered or suppressed for months and people stayed home due to COVID restrictions. People delayed purchases and demand built up over time so that when everything did reopen, a flood of pent-up demand flooded our depleted supply of goods and services and led to shortages that drove up prices. Research from the Cleveland FED shows that much of the increase in inflation in the U.S. and Eurozone was caused by supply problems that made it impossible for producers to meet resurgent demand.

Supply chains are now back to normal and COVID disruptions are gone, but geopolitical disruptions remain, continuing to impact trade. This is not limited to the Russia-Ukraine war but also growing disruption in the Middle East, fresh rounds of U.S. tariffs on China, the potential for Donald Trump to further upend the trade order, etc. We must consider how to protect our economy from such shocks in the future. It is important to be realistic—we cannot divorce ourselves from global supply chains, but we can improve our resilience to shocks, both domestic and international.

Policy Solutions

• Reinforce Canada’s energy independence by ensuring that we have sufficient energy and natural resource infrastructure to serve our entire country from our own resources, to cope with supply shocks, and to support our allies.  

• We also need to dramatically accelerate the approvals process for Canadian production of rare earth minerals. As Minister Wilkinson has noted, “It cannot take us 12 to 15 years to open a new mine in this country.” Canada’s extremely burdensome environmental review processes are undermining the viability of its energy independence by causing a collapse in investment—the number of major natural resource projects completed between 2015 and 2023 declined by 36.4 percent. We never want to be in a situation like Germany, which has seen permanent structural demand destruction due to its dependence on Russian natural gas. 

• Canada should make massive investments in our trade infrastructure, including ports, rail, and airports so that in the event of a future shock, the country easily has the capacity to surge imports to make up for a shortage or to double exports of fertilizer or LNG to support our allies. This would have the welcome bonus of boosting Canadian productivity by helping exporters get their goods to market more quickly and cheaply. In addition, it can be productivity-enhancing. Economist Trevor Tombe has pointed out that we need more funding for critical infrastructure because “our transport infrastructure is inadequate and our productivity suffers as a result.”

• Create incentives for “friend-shoring.” Simplify the customs paperwork and regulatory requirements for importing products from allied countries (those with which we have trade agreements) and make it tougher to import from other countries with increased scrutiny around human rights and forced labour, and tariffs for countries with a track record of dumping, trade abuses, and IP theft.

2. Monetary policy failed to apply the brakes

The fact that inflation hit 8.1 percent in June 2022 while interest rates were rising faster than at any point in Canadian history has demonstrated that the Bank of Canada, like many central banks throughout the advanced economies, held interest rates too low for too long and continued quantitative easing when it was no longer needed.  

When inflation did appear, central banks initially declared it “transitory,” a temporary phenomenon that would take care of itself. They then found themselves behind the curve, offering too little too late and in need of unprecedented interest rate hikes, from 0.25 percent to 5 percent in a little over a year. 

In the U.S., the Federal Reserve has come under considerable criticism for policy mistakes. As Larry Summers put it:

I do think there needs to be considerable soul searching at the Fed as to how they missed this as badly as they did. They were declaring that inflation would be transitory through most of 2021, even as it was becoming clearer and clearer to a growing number of observers that inflation was not a path to being purely transitory.

To his credit, the Bank of Canada governor did some of the soul-searching recommended by Summers. Tiff Macklem wrote in February 2024 that he and his team had underestimated the strength and persistence of inflation in 2021 and 2022 in the midst of a series of shocks. Also, the Bank’s models weren’t properly calibrated to measure price pressures throughout the economy, he wrote, and Bank officials were “not sufficiently attentive to the risk that inflation could rise sharply.”

To be fair, it would also have been impossible for the Bank of Canada to foresee how serious the COVID crisis would be. A shutdown of the Canadian economy could have lasted years and been far more devastating. As then-governor Stephen Poloz explained, “A firefighter has never been criticized for using too much water.” 

It’s not at all clear that the performance of the Bank of Canada has been worse than other central banks. It is entirely possible to argue that the Bank did well in engineering a “soft landing.” Nevertheless, the inflation crisis precipitated by the pandemic has proven the need to reinforce the Bank’s inflation mandate and improve Parliamentary oversight without harming the Bank’s independence.

Policy Solutions

• Clarify the bank’s mandate. The government of Canada must clarify that the Bank’s mandate is price stability: the 2 percent inflation target and nothing else. Not inclusive growth or climate change or digital currency. When the Bank of Canada renewed its mandate in 2021, a number of economists raised the alarm about odd language “promoting maximum sustainable employment” in the joint statement from the Bank and the government. As McGill University economist Chris Ragan has stated, “All of us should be worried about the future. If the government is not really committed to having an operationally independent Bank of Canada pursuing low and stable inflation, then there is good reason to expect that inflation and inflation expectations may become unanchored.”

• Conduct an independent review of quantitative easing and unorthodox monetary policy by a team of respected economists. The Bank of Canada has already talked about some of the mistakes that it’s made, but its judgment isn’t being subjected to independent analysis. There needs to be an independent audit to ensure real accountability.

• Improve Parliamentary oversight, particularly for unconventional policies. If the Bank of Canada wishes to implement unconventional monetary policies such as quantitative easing, the governor should be required to make an appearance at the House Finance Committee to explain the rationale, risks, and benefits, and provide a written report to Parliament. Of course, the Bank of Canada’s independence would remain unaffected, but the accountability would ensure democratic oversight.

3. Fiscal policy fuelled the inflation 

In response to the COVID crisis, governments around the world spent massive sums to counteract the effects of shutdowns across the economy. We’re now seeing a consensus emerge that inflation was driven by the excessive size of COVID stimulus packages which injected massive amounts of stimulus into the economy at a time of supply constraints. Research also shows that the governments that spent the most had the highest inflation, while the more moderate spenders have had lower inflation rates to contend with.

In Canada in 2020-21 (see Figure 1), federal program expenditures almost doubled from $349 billion to $623 billion, an increase amounting to 14 percent of GDP. And the spending kept on coming: an additional $130 billion or 6 percent of GDP in 2021-22 and another $100 billion or 4.5 percent of GDP in 2022-23. This pushed an explosion of demand (almost 20 percent of GDP) into our economy of diminished supply and created shortages that drove prices sky-high.

On top of this, provincial program spending surged by 9.2 percent in 2020-21 to $504.4 billion and an estimated further 5.6 percent to $532.9 billion in 2021-22. This is a much smaller percentage increase than the near doubling of federal spending. However, most provincial spending never retreated when the COVID crisis passed. Ontario, B.C., and Quebec all have program spending this year which is above the peak COVID budgets in 2021 and 2022.

The fact that the government of Canada was unable to turn off the spending taps, even when it became clear that the COVID crisis was over and inflation was accelerating, made it more difficult for the Bank of Canada to cool the economy. Effectively, the Bank was hitting the brakes while the federal government and many provincial governments were flooring the accelerator. According to Scotiabank, excessive government spending forced the Bank to raise interest rates by an additional 2 percent. 

Overall federal program spending remains well above pre-crisis levels at 16 percent of GDP compared to the 13.2 percent average before the crisis. Despite all this, Budget 2024 just added another $5 billion of annual spending annually and it’s no doubt to head even higher as we get closer to an election in 2025.

Policy solutions

• The federal government should cease or postpone all new spending programs until inflation stabilizes within target and the Bank has lowered the policy rate to neutral levels. This will prevent excess spending from pushing interest rates higher. If fiscal and monetary policy are not working in tandem, they will be working against one another. 

• Establish a credible path back to a balanced budget. Even if it takes say five or more years, it is important for investors and markets to understand that the government is serious about fiscal discipline in order to bring down long-term interest rates. Shifting fiscal guardrails or anchors is not enough. 

• Adopt an internal budgeting system where new spending priorities can only be funded by reallocating from existing programs that are less needed or underperforming. This will force departments to prioritize and reinforce with the public that there is no need for cuts. The Trudeau government has taken tentative steps toward spending reviews, but these have not produced any significant savings so more rigorous processes are needed.

4. Firm behaviour and competition

Some left-wing politicians in Canada who believe that inflation is caused by corporate greed alone have been summoning grocery store CEOs to various Parliamentary committees to yell at them. Instead, they should listen to economist Brian Albrecht who says: “Blaming inflation on greed is like blaming plane crashes on gravity.” 

It may be literally true that planes crash because of gravity, but gravity is a pre-existing condition that has always been with us. Planes ought to fly in spite of gravity. Similarly, corporations have always sought to maximize profit, but they can provide low prices in spite of their desire to make money by ensuring competition. 

Nevertheless, we can’t be too dismissive about firm behaviour and competition. Isabella Weber has written some fascinating work on sellers’ inflation, defined as “when the corporate sector manages to pass on a major cost shock to consumers by increasing prices to protect or enhance its profit margins.” In a normal competitive market economy, firms are extremely reluctant to hike prices across the board, even when they’re under pressure from rising costs because they fear losing out to competitors. 

But imagine there is a supply chain crisis that affects all retailers and they know for certain that all of their competitors will have to raise prices. Then they’d be a fool not to raise prices concurrently with their competitors.

In fact, IMF research showed that in Europe rising corporate profits account for almost half of the increase in inflation in 2021 and 2022.

The Bank of Canada has done some great research comparing inflation rates and corporate profit margins. It found that:

While changes in markups may have contributed to the initial rise of inflation in 2021, their contribution dissipated by the end of 2021 and growth in marginal costs was the driving force of peak inflation. […] during 2021 the contribution of markup growth to inflation was positive but mild—inflation during 2021 was 5.1 percent, whereas markup growth was only 0.44 percent over the same period (less than one-tenth the rate of inflation).

The evidence for sellers’ inflation is somewhat mixed and the concept may be more theoretical than practical. Still, the only way to ensure that profits are not excessive is to foster a real competitive policy environment to bring down prices. One critical point is that competition law by itself cannot create competition. Competition laws in Canada have been strengthened with increased penalties at least three times without having much of a noticeable effect on prices.

There are two ways to lower prices by encouraging competition. The first is to eliminate many government barriers to competition, including: a) restrictions against foreign businesses; b) state-owned monopolies; and c) regulatory barriers to entry. Research by George Mason University Economist Vincent Geloso estimated that 32.6 percent of Canada’s economy is effectively protected from competition. 

The second is to provide incentives to encourage investment in concentrated sectors (e.g. airlines) or in regions (rural areas where there are one or few grocery stores), or overall, by making Canada a more attractive place to invest with tax incentives or bringing down the high cost of doing business in Canada through regulatory reforms and tax reductions. 

The ultimate goal is to push down prices by having multiple companies investing and competing aggressively to steal customers from one another. This cannot be achieved by having the industry minister cold-calling foreign grocery stores to ask them to come to Canada. Particularly in the current environment, who would respond to Canada’s invitation to invest hundreds of millions in order to be constantly threatened with excess profit taxes on top of high costs, onerous regulations, and carbon taxes?

It’s time to make Canada an exciting place to invest and build a business.

Policy solutions

• Reduce or eliminate government barriers to competition in the form of foreign ownership restrictions, state-owned monopolies, and regulatory barriers that impact almost a third of Canada’s economy.

• Bring in a ten-year corporate tax holiday for new capital investments in areas that require more competition. If a grocer (Canadian or foreign) builds a new store in an underserved area, they get 10 years free of corporate income tax.

• Ban mergers and acquisitions for businesses in the sectors that are already too concentrated (telcos, banks, grocery stores), so that they are prohibited unless the minister makes an exception. This would reverse the onus so that a proposed merger would by default be disallowed unless it can be demonstrated that it would not damage competition.

• Slash regulation. Begin a government-wide overhaul to reduce regulation by appointing a minister responsible for red tape reduction, and set a 30 percent reduction target for every federal department. The government should also establish a “regulatory budget” working with business to calculate the costs that are imposed by regulation and then setting a declining overall “budget” for the costs of regulation that might be imposed in a given year. This approach led to significantly improved economic performance in British Columbia according to research from George Mason University. 

• Allow full expensing of all capital investments in the year they were made. Canada currently allows some accelerated write-downs already, but these are being phased out, which will cause a huge tax increase on business investment taxes, according to Trevor Tombe. Canada needs to reduce the competitiveness gap and provide more investment incentives.

5. Housing—The toughest nut to crack

Right now, the fastest-growing parts of inflation are in housing, the sector that is driving the greatest unhappiness among young people. In March, rents grew by 8.5 percent compared to a year ago while mortgage interest costs were up 25 percent, and owned accommodation costs rose 7 percent. 

In the short term, the problem is not going to get better—in fact, the housing shortage will get worse this year and will be even worse next year—because Canada’s construction industry cannot keep pace with the growth in population. 

The government’s latest target to build 3.9 million homes by 2031 would require eight years of building almost 500,000 homes per year. There is simply no one in the housing industry who thinks that this is remotely achievable. Canada’s housing starts are currently at about 240,000 per year and are projected to trend lower this year before a modest recovery according to the CMHC.

Canada certainly does not have the workers to double the rate of home construction, but we also don’t have the capital, with an estimated $1 trillion required to build the additional homes. 

Proportionally, Canada is building homes much faster than the Americans. The U.S. is currently building 1.5 million homes annually, which is the equivalent of Canada building just 150,000. If the government’s strategy to accelerate construction were able to build 280,000 or 290,000 per year, it would be a heroic achievement, roughly twice U.S. levels.

Why our construction industry can’t catch up and why U.S. homes are so much cheaper

The U.S. brings in 1 million permanent residents per year and its temporary worker visa programs are proportionally smaller than Canada’s (in the U.S., 900,000 of the various H Visas were approved last year alongside 472,000 international students). Canada’s official target is 500,000 permanent residents. But when one accounts for international students, temporary foreign workers, and other non-permanent residents, Canada brought in 1.3 million immigrants in 2023, which is five times U.S. immigration levels. 

The CMHC projection that we’ll have a shortage of 3.5 million homes by 2030 is based on Canada having a population of 43 million by 2030. In fact, Canada’s population is already at 40.8 million and will hit 43 million in just over two years. (The reduction in international students will slow Canada’s population growth from 1.2 million per year to 900,000-1 million per year.) This means that Canada is on track to face CMHC’s 3.5 million housing gap sometime as early as 2026 rather than 2030.

The government and the official opposition have proposed a series of thoughtful and effective policies to accelerate home construction, but there are limits to how much supply can be increased. The point is that even if you build 250,000 or 300,000 homes per year while the population is growing by 1 million per year, then the housing shortage will continue to worsen as demand will far outstrip supply. 

Policy solutions

• Canada’s annual immigration target of permanent residents (i.e. 500,000 annually) needs to be overhauled so that the provinces that are responsible for so many of the policy levers related to immigration settlement (including education, health care, housing, etc.) are involved. The federal government should set a much lower target in order to accommodate the global talent streams, family reunification, and asylum seekers. On top of that, each province would be able to accept additional immigration up to the number of homes built in the previous year. They could determine how to allocate among the various categories (skilled, temporary foreign workers, etc.) based on the needs of their industries.

• Every college or university should have sufficient rental accommodation available to accommodate substantially all of its international students. The federal government could provide cheap loans to support educational institutions in building residence facilities.

Key takeaways

In conclusion, addressing inflation in Canada requires a decisive approach that covers all the five forces behind the rise in prices over the past few years. By enhancing energy independence, bolstering trade infrastructure, and refining monetary and fiscal policies, Canada can pave the way toward a more stable economic future. Additionally, fostering greater market competition and adjusting immigration targets to align with housing capabilities are essential steps. 

As we implement these solutions, we can do even better: improving productivity, capital investment and innovation will drive up the wages of Canadian workers with better jobs. Thus, a future DeepDive will cover how to raise Canadian wages. The ultimate goal is to not only stabilize prices but also support sustainable growth and improve the quality of life for all Canadians.

DeepDives is a bi-weekly essay series exploring key issues related to the economy. The goal of the series is to provide Hub readers with original analysis of the economic trends and ideas that are shaping this high stakes moment for Canadian productivity, prosperity, and economic wellbeing. The series features the writing of leading academics, area experts and policy practitioners. The DeepDives series is made possible thanks to the ongoing support of Centre for Civic Engagement.

It’s increasingly recognized in policy and political circles that one of the biggest challenges facing the country is economic stagnation and declining living standards. This has led policy scholars to try to understand the causes and sources of Canada’s economic malaise. 

New research by Macdonald-Laurier Institute fellow Heather Exner-Pirot points to challenges in Canada’s natural resource sector as a “smoking gun.” Her basic insight is that a combination of economic forces and policy-induced harms have undermined what her colleagues Philip Cross and Jack Mintz have characterized as the country’s “golden goose” and that this has significant explanatory power for the overall decline in business investment, productivity, and economic activity. 

The purpose of this DeepDive is to test that hypothesis. It aims to understand the economic importance of Canada’s natural resource sector and the extent to which the headwinds that it has faced over the past several years have contributed to the country’s “lost decade.” 

As part of this analysis, we also examine the factors—including the role of government policy—that have impeded the natural resource sector’s ability to contribute to more economic growth and higher living standards for Canadians.  

Canada’s natural resource endowment

Canadian economic history is replete with an understanding of the disproportionate role of our natural resource endowment. From the fur trade to the “staples thesis,” scholars have put natural resources at the centre of their conception of Canada’s political economy. 

Not everyone of course has viewed the outsized role of natural resources in favourable terms. The notion of “hewers of wood and drawers of water” is often characterized as a sign of failure. It represents a squandered opportunity on the part of Canada to transition to what are sometimes perceived as higher-value sectors. One can find plenty of evidence of policy scholars and political actors lamenting Canada’s so-called “resource curse.”

In 2016, Prime Minister Justin Trudeau, for instance, told the World Economic Forum: “My predecessor wanted you to know Canada for its resources. Well, I want you to know Canadians for our resourcefulness.” 

Cardus Institute scholar Brian Dijkema has challenged this line of thinking as misguided and harmful to Canada’s economic interests. As he and a co-author have written: 

We need to stop thinking that being “hewers of wood and drawers of water” is something to be self-conscious about and start seeing it as the source of Canada’s global advantage. In fact, hewing wood and drawing water has…helped to turn Canada into a land flowing with milk and honey that continues to attract people from all over the world.

Dijkema’s characterization is backed up by the data. Across a number of key economic metrics—  including economic activity, employment, income, investment, productivity, and exports—Canada’s natural resources are a huge economic asset. 

The challenges that the sector has faced over the past several years—including as a result of specific government policies—are a key contributor to Canada’s overall economic malaise. The inverse therefore is also true: boosting our natural resources^{1The definition of natural resources used throughout the DeepDive follows recent work by Cross and Mintz, unless otherwise specified. That is to say, the natural resource sector constitutes agriculture, forestry, fishing, mining, utilities, pipelines, and manufacturers using natural resources for at least 17 percent or more of all inputs. This definition is quite expansive and at points the DeepDive zooms in on certain critical components of the natural resource definition.} could have positive economy-wide effects. 

The economic benefits of natural resources

Economic activity 

The natural resource sector is a major driver of Canada’s economic activity. In 2019, according to estimates by Cross and Mintz, natural resources accounted for 14.9 percent of Canada’s gross domestic product. This percentage has fallen in recent years, after peaking in 2008 at 19.5 percent, when the commodity cycle crashed in 2014-15. 

Using the 2019 estimates, the oil and gas subsector was the largest overall contributor to the natural resource sector’s economic output, accounting for 28 percent of the sector’s total economic contribution. Mining accounted for roughly 10 percent of the natural resource sector’s output, with agriculture, forestry, and fishing adding another 12 percent. The remainder of the sector’s economic contributions are derived from utilities, resource-intensive manufacturing, and pipeline transport. 

Overall, what is clear is that notwithstanding the 2014-15 drop in commodity prices and the harms to the sector from government policy, natural resource development continues to be a major source of economic output in Canada. 

Employment

When considering the sector’s employment impact, we use a slightly truncated definition of natural resources to utilize an existing Statistics Canada dataset that better allows for inter-provincial comparisons.

Overall, in 2021, natural resources employment totaled almost 920,000 jobs, or about 5.6 percent of total Canadian employment. Canada’s four largest provinces account for 86.5 percent of employment in the natural resource sector. Ontario leads the way with over 280,000 jobs, followed by Quebec with almost 200,000, Alberta with almost 190,000, and BC with almost 120,000. 

Not only is the natural resource sector a major source of total employment, but the distribution of its employment is highly advantageous too. The geographical distribution of natural resource jobs diverges from the concentration of employment in a small number of major Canadian cities. In fact, a 2021 Natural Resources Canada report found that in more than 1,800 rural and remote communities across Canada, most of which have populations of 10,000 or less, an average of 30 percent of jobs in those communities were dependent on the natural resource sector. 

Mineral deposits, managed forests, and oil and gas reservoirs are dispersed across the country and generally located near rural and remote communities. Take the oil and gas sector for instance. It is present in Newfoundland, southwestern Ontario, Alberta, and Saskatchewan, as well as potentially in the Arctic. This provides well-compensated employment opportunities for those who want to remain in or closer to their own communities. 

Natural resources also employ people across the skills distribution, including large numbers without post-secondary credentials. In fact, more than 40 percent of those employed in the sector in 2021 had a high school diploma or less. 

As other parts of the economy have gone through a process of “job polarization” in which demand for mid-skilled workers has fallen significantly, the natural resource sector has protected Canada from middle-class erosion experienced elsewhere. Its sustained labour demand for well-paid upstream oil and gas roughnecks, forest managers, and mining technicians working in the field and midstream locations has been identified by University of British Columbia economist Kevin Milligan as responsible for “sustaining Canada’s middle class.”

Incomes

Incomes are higher in the natural resource sector than most other parts of the economy. The average gross weekly pay in the mining and oil and gas sectors has been consistently the highest in Canada since 2007. As seen in Figure 1, the average weekly salary of $2,302.94 is double that of the average service worker ($1,145.63) and is even more than the average in professional services, finance, or health care. 

The natural resource sector’s wage premium has been especially beneficial to Indigenous Canadians. Indigenous workers in the mining and oil gas sectors have the highest median income of their peers by more than double ($99,000 versus $41,000). 

According to the Indigenous Resource Network, the Indigenous workforce in forestry, mining, and oil and gas is higher than its overall share of the population and quite a bit higher than the percentage in the federal government (see Figure 2). 

Investment 

Natural resources also dominate Canadian overall business investment. In 2023, capital investments in the natural resources sector were estimated to amount to $109.0 billion or 43.6 percent of all business investment in tangible assets such as structures, machinery, and equipment. At the height of the commodity cycle that coincided with a large upswing in the sector’s capital expenditures, natural resources accounted for as high as nearly 60 percent of all business investment in 2014. 

As of 2023, energy accounted for over 60 percent of the sector’s total business investment, down from 80 percent in 2014. While energy’s share of sector business investment may be falling, investment has continued to rise in mining and utilities, as those subsectors expand their capital outlays to keep up with heightened demand from growing electrification efforts.

Productivity 

Although Canada is in the midst of a productivity crisis in overall terms, the natural resource sector is something of an outlier. Mining and oil and gas extraction, as well as utilities, are some of Canada’s most productive industries, measured as real output per hour worked. Using data from Statistics Canada, figure 3 shows that labour productivity in the mining and oil and gas extraction sectors is more than three times greater than the all-industry average and almost three-and-a-half times greater than the government sector. 

Exports

Energy products alone are Canada’s most lucrative export sector, outearning every other subsector,  including, for instance, commercial services and motor vehicles (see Figure 4). Added together with mining and forestry, these three natural resource subsectors have made up about 30 percent of total exports since 2017. They are critical building blocks of a stable Canadian economy. Additionally, they offer a unique geographic-based value proposition because they cannot be outsourced to other countries. The resources and the operations to extract them must be located in Canada because the deposits are here. In an increasingly globalized world, this is a true advantage to building a strong domestic economy.

The key takeaway here is that across a number of key economic metrics—including economic activity, employment, income, investment, productivity, and exports—the natural resource sector is a huge economic asset. Even as it has faced headwinds (discussed below in more detail) it has generally outperformed other parts of the economy. It stands to reason, therefore,that if Canada has a more hospitable policy environment for natural resources, then they can play a key role in boosting overall economic output. 

Challenges facing the natural resources sector

If the natural resource sector is the main engine of the Canadian economy, it has not been firing on all cylinders. Since 2015, for instance, natural resource exports have actually shrunk in real terms (see Figure 5). Oil and gas exports have decreased by as much as 13 percent. Mining and forestry exports shrunk by 5 percent and 2 percent respectively. 

Similarly, while the sector remains a major source of business investment, it has experienced a decline itself over the past several years. As Tyler Meredith, a former adviser to Prime Minister Trudeau, noted in a previous Hub essay, resource investment actually fell between 2014 and 2022 by as much as $52 billion. Today annual investment in mining and oil and gas is about half the level that it was during the Harper government. 

One way to understand these developments is to compare the value of major resource projects planned or underway in Canada since the Trudeau government was first elected. According to the government’s own Major Project Inventory, in 2015, the total projected value of Canada’s next decade of resource projects was $712 billion. As of 2023, it stands nominally at $572 billion, representing a drop of $150 billion (see Figure 6). In real terms, it amounts to a decline from $712 billion to $454 billion—or $258 billion in eight years. 

The trend is similar when one examines the number of canceled projects. As Figure 7 shows, since 2015, Canada has seen nearly $670 billion in natural resources projects suspended or canceled. If even 21 percent of the value of these failed projects had been realized, the nominal investment loss would have been eliminated. 

It prompts the question: what is happening? 

Economic factors—namely the commodity downturn in 2014-15—are a big part of the story. Research by the Bank of Canada finds that the decline in oil prices that began in 2014 and persisted until 2022 had significant effects on the sector and the economy as a whole. There is no doubt for instance that it had a negative effect on resource investment and employment. 

But it would be wrong to assume that the challenges facing the sector have been limited to exogenous factors. Government policy has played a role too. 

As Exner-Pirot outlines, the Trudeau government has enacted a series of policies that have harmed the investment climate for resource projects. These include: The Impact Assessment Act, which further inserted the federal government into resource project approvals, the oil tanker moratorium, the moratorium on offshore Arctic oil and gas licensing, industrial carbon pricing, the UNDRIP Action Plan, rejection of the Northern Gateway pipeline, methane regulations, Clean Fuel Regulations, the proposed Clean Electricity Standard, and now the proposed emissions cap for the oil and gas sector. 

Evidence from the Fraser Institute’s latest survey of energy sector executives indicates that these policies have had a deleterious effect on the investment climate by raising costs and contributing to policy uncertainty. 

The emissions cap is a good example. This is a policy that specifically targets Canada’s biggest source of exports with greater regulatory stringency than any other part of the economy. Separate analysis by Public Policy Forum fellow Don Wright and University of Calgary economist Trevor Tombe finds that such a policy will come with significant economic costs—including in Tombe’s case an estimate that the costs will extend beyond the oil and gas-producing provinces.  

Key takeaways

The evidence is rather clear that being a “hewer of wood and drawer of water” has produced positive economic outcomes for Canada. The natural resource sector—including forestry, mining, and oil and gas—is a major source of employment, investment, and economic output. It is also more productive than other parts of the economy and is the source of well-paying jobs for people and places that are less represented in other sectors. 

Yet notwithstanding the sector’s major contributions to Canada’s overall economy, it has faced headwinds over the past decade or so that have held it back. A major one is the end of a commodity supercycle in 2014-15 that put downward pressure on investment and employment for a near decade. The good news is that these exogenous forces have since dissipated and, as Exner Pirot highlights, we seem to be moving into a prolonged bull market for commodities. 

Canada’s ability to leverage growing global demand will require overcoming the second challenge facing the sector: harmful government policy. The past decade has witnessed a cumulative burden of regulations and other policies on our natural resources that have produced significant opportunity costs. 

At a time when policymakers are concerned with boosting economic growth and Canadian living standards, it stands to reason that one of the most impactful steps that they could take is unleashing the natural resource sector. As Exner-Pirot rightly concludes: 

Bright spots in the natural resource sector’s performance have mostly been despite, rather than because of, federal government policy. As we move into a prolonged bull market for commodities, the entreaties of the last century should be heeded. Let us celebrate and support our resource and energy sector with good, common sense policy. When we do, it can provide an incredible foundation for growth, productivity, security, and prosperity for all Canadians.