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 the Centre for Civic Engagement.
Parliament returns this week amid a worrisome economic backdrop. Canada’s GDP shrank by an annualized 1.6 percent in the second quarter of 2025, surprising many economists who had expected a more modest decline of around 0.6 percent. As for employment, the economy shed 66,000 jobs in August, predominantly in part-time roles, driving the unemployment rate up to 7.1 percent—the highest level outside the pandemic since 2016.
These recent developments indicate that Canada’s economy is deteriorating in real time. The secular trends aren’t encouraging either. The OECD’s latest survey of Canada point to some bigger problems over the horizon.
Its assessment is blunt: Real GDP per capita has fallen below pre-pandemic levels, productivity growth has flatlined, and housing affordability has reached crisis proportions. At the same time, Canada’s heavy reliance on U.S. trade has left it dangerously exposed to tariff shocks, while business investment remains stubbornly weak despite years of policy incentives. Together, these forces suggest that the country isn’t just weathering a temporary slowdown but facing a structural stagnation.
This DeepDive takes a closer look at the OECD’s findings and what they mean for Canada’s economic future. It explores the interlocking weaknesses that are holding back prosperity—from a productivity malaise decades in the making, to a brittle trade architecture, to a housing system that is actively eroding affordability. With Parliament returning, the challenge for policymakers is clear: Canada needs more than marginal adjustments. It needs a blueprint for economic renewal that matches the scale of the crisis.
Productivity and per capita growth: An increasingly perennial challenge
For a while now, Canada’s economic engine has been running, but it’s barely been moving the car. While the country has posted decent overall growth since the pandemic, it has done so largely by increasing the number of people in the economy rather than the value each person produces. As the OECD bluntly puts it, “GDP per capita has trended lower and fallen below pre-pandemic levels” even as population growth exceeded 3 percent annually in both 2023 and 2024.
This isn’t a new trend. Over the past two decades, average labour productivity growth in Canada has hovered just above 1 percent per year, roughly half the rate in the U.S. That gap isn’t a matter of cyclical timing or global conditions. It reflects deep structural deficiencies in Canada’s economic model, which now relies heavily on expanding the labour force rather than increasing the productivity of existing workers.
As this OECD chart shows, Canada’s average annual productivity growth over the past 20 years stands at just 0.8 percent, well below the U.S. at 1.5 percent and the OECD average of 1.6 percent. Only a handful of advanced economies, including Italy and Norway, have performed worse than this.
Part of the explanation lies in Canada’s immigration mix. The OECD notes that the recent surge in population has been overwhelmingly driven by non-permanent residents—international students, temporary workers, and asylum seekers—whose presence, while boosting headline labour supply, often comes with lower-than-average productivity. The skill mismatch is real. Overqualification, underemployment, and poor credential recognition mean many newcomers are working in low-output sectors far below their potential. According to the OECD, this has placed downward pressure on both capital intensity and productivity, dragging down per capita output.
The investment side of the equation is no better. Business investment in Canada has been persistently weak since 2015 and remains below pre-COVID levels. Even as the previous federal government has rolled out investment tax credits, especially in green technology, there has been little rebound. Capital per worker is falling, not rising, precisely when it needs to do the opposite to support a larger population base.
What makes the productivity malaise so dangerous is that it compounds. With fewer gains in output per hour worked, wage growth stalls, innovation slows, and fiscal revenues stagnate, just as health care, infrastructure, and defence costs balloon. The OECD is clear: without a step-change in productivity, the outlook for per capita prosperity will remain grim.
Trade exposure and economic fragility: Will Canada finally diversify?
Canada’s trade model has long been a high-stakes gamble on U.S. market access. That bet may increasingly look risky.
According to the OECD, over 75 percent of Canadian goods exports still go to the United States. This includes entire industrial sectors, such as the automotive, energy, and manufacturing sectors, which are now facing serious disruption from the various tariffs imposed by the Trump administration. These tariffs, ranging from 10 to 35 percent, are projected to reduce Canadian GDP substantially, depending on how trade flows adjust. TD economists predict that these tariffs may put Canada into a recession if they are imposed for at least five to six months.
The charts below make the concentration stark: In 2024, over 76 percent of Canadian goods exports were sent to the U.S., and more than half of services exports followed suit. Canada remains uniquely exposed among advanced economies to a single trading partner.
The economic blow is immediate and direct. Canada’s export base is narrow and concentrated in a few high-value goods, such as automobiles and aluminium, that are acutely sensitive to geopolitical shocks. The OECD warns that “industries heavily dependent on U.S. trade with limited short-term diversification potential will be most affected,” singling out metal processing and transport equipment manufacturing as particularly exposed. In 2023, these sectors relied on the U.S. for over 60 percent of their value added.
The inflationary spillover is also real. Roughly 13 percent of the Canadian Consumer Price Index (CPI) basket consists of goods imported from the U.S., and about 5 percent of that is directly impacted by retaliatory tariffs. This has added pressure to core inflation, even as headline CPI hovers near the Bank of Canada’s 2 percent target.
Furthermore, many Canadian firms lack the scale, technological sophistication, or institutional support necessary to diversify into new markets. The OECD finds that weak internal market integration, barriers to interprovincial trade, and regulatory fragmentation hinder firms’ ability to grow to an export-ready scale. Without deep structural reforms, diversification from the U.S. market is more aspirational than achievable.
In short, Canada’s trade strategy isn’t just fragile—it is dangerously brittle. It leaves the entire economy vulnerable to the whims of a single trading partner with growing protectionist tendencies and diminishing political predictability.
Housing market dysfunction and the collapse of affordability
If Canada’s productivity woes are the country’s hidden illness, the housing crisis is its most visible symptom. Home prices have risen by an astonishing 120 percent since 2007—vastly outpacing income growth and placing Canada among the least affordable housing markets in the OECD. What used to be a household asset class is now a macroeconomic liability.
The OECD’s 2025 Survey paints a damning picture. Despite record immigration, housing completions have consistently lagged population growth. The result? Soaring rents, skyrocketing home prices, and a generation of Canadians locked out of ownership. In Toronto and Vancouver, even dual-income professional families are struggling to find adequate housing without stretching themselves financially thin.
As this chart from the Federal Reserve Bank of Dallas shows, Canada’s real house price index (RHPI) has diverged sharply from the real disposable income index (RPDI) since 2000. While incomes have grown steadily but modestly, home prices have surged, particularly after 2010, driven by demand-side pressure and severe supply constraints. By 2022, real house prices had climbed nearly 2.5 times higher than their 2000 levels, while disposable incomes grew by less than half that pace.
The problem is fundamentally one of supply—and more precisely, the inability to build enough housing where and when it’s needed. Over 50 percent of the Canadian housing stock consists of low-density detached homes, largely a result of exclusionary zoning policies. Municipalities continue to enforce single-family zoning, stymying efforts to build multi-family or medium-density units near transit and jobs.
Permitting delays and municipal red tape only exacerbate the situation. The OECD estimates that these factors can add as much as 30 percent to the final cost of new housing in major cities. Development charges, long approval timelines, and a lack of coordinated planning between different levels of government all contribute to the bottleneck.
Even when approvals are granted, there are real barriers to getting shovels in the ground. The construction industry faces acute labour shortages, especially among skilled trades. Credentialing hurdles, union constraints, and a lack of training pipelines have all conspired to slow down the build-out of desperately needed units.
Perhaps most damningly, the housing crisis is now entangled with Canada’s immigration and economic growth model. A country that relies on expanding its population to drive GDP growth cannot afford to have a housing system that fails to accommodate that population. The OECD warns that recent immigration flows—especially those of non-permanent residents—have put an enormous strain on housing availability, particularly in the rental market. Without reform, this tension risks undermining both social cohesion and economic performance.
Policy recommendations to spur productivity and per capita GDP growth
Canada’s productivity crisis sits at the heart of its economic stagnation. Real GDP per capita continues to stagnate, and average labour productivity growth has hovered just above 1 percent annually for decades, well below OECD and U.S. benchmarks. This malaise is not a statistical quirk; it reflects a deeper erosion in capital investment, labour market efficiency, and sectoral competitiveness. A renewed policy architecture must address each of these weaknesses head-on.
Tax policy is the most immediate lever for change. As University of Calgary economist Trevor Tombe has outlined, Canada imposes among the highest marginal effective tax rates on new investment in the developed world. This disincentivizes the very capital formation—machinery, software, advanced equipment—necessary to raise output per worker. Full expensing of capital assets, lower corporate tax rates, and a shift toward taxing consumption rather than business inputs would restore the incentive to invest. Furthermore, adopting an Estonian-style model, where only distributed profits are taxed, could transform retained earnings into a powerful engine for productivity growth, aligning firm behaviour with long-term economic performance.
Immigration reform must also play a central role. The problem Canada faces on the immigration front is not just one of volume but also of fit. Canada admits hundreds of thousands of temporary residents each year, many of whom are underemployed in low-output sectors. The result is a growing workforce denominator without proportional gains in GDP. A reoriented immigration system would better match applicants to sectoral needs, emphasize permanent pathways for skilled workers, and resolve credentialing bottlenecks that sideline talent. The goal is not fewer people, but better-utilized human capital.
Ultimately, Canada must capitalize on its comparative advantages—particularly in natural resources. Contrary to popular belief, the resource sector is a productivity powerhouse. When resource extraction is excluded, national productivity figures collapse. Yet regulatory fragmentation, permitting delays, and infrastructure bottlenecks continue to constrain investment. Streamlining environmental assessments, accelerating project approvals, and expanding trade infrastructure would unlock significant gains. Supporting innovation in areas such as carbon capture and critical minerals can further align productivity with sustainability.
Rebuilding Canada’s productivity base is not optional—it is the precondition for restoring per capita growth and broad-based economic security.
Policy recommendations for trade diversification
Canada’s trade vulnerabilities have become too acute to ignore, as we move into an economic world increasingly dominated by an aggressive tariff agenda from our largest trading partner. A meaningful response must begin by addressing the hard infrastructure, firm-level competitiveness, and structural barriers that inhibit trade diversification and resilience.
A gantry crane operator removes a container from a cargo ship while docked at port, in Vancouver, on Tuesday, July 16, 2024. Darryl Dyck/The Canadian Press.
Canada’s logistics infrastructure is no longer fit for purpose, and without significant upgrades to ports, rail corridors, and energy transportation systems, even the best trade deals or diversification strategies will stall. The current bottlenecks not only limit physical access to Asian, European, and other global markets but also entrench our overreliance on the U.S. economy. Infrastructure investment, both public and crowd-incentivized private, is necessary to facilitate new export flows and mitigate market access risk.
At the firm level, Canada faces a second challenge: domestic competitiveness. Too much of the economy remains closed off from competition that could drive innovation and industry growth. Policymakers would do well to resist calls to embrace a renewed economic nationalist agenda as part of trade diversification efforts. Such policies will only stifle the competition Canada needs, and history shows us that economic nationalism will not equate to sustainable economic growth.
Lastly, internal trade remains a grossly overlooked obstacle to economic renewal. Recent estimates suggest that interprovincial trade barriers suppress GDP by around 7 percent and restrict labour mobility, trucking efficiency, and even the distribution of simple goods. These restrictions persist largely due to provincial jurisdiction and inertia in protectionist policies. A credible federal strategy could involve conditional transfers or tax incentives to encourage regulatory harmonization. In an era when Canada must optimize every channel of growth, breaking down internal economic walls is not just low-hanging fruit—it’s long-overdue reform.
Canada’s vulnerability to trade shocks will only deepen without structural reform. Modernizing trade infrastructure, fostering competitive firms, and liberalizing interprovincial trade are essential for building a more shock-resilient and diversified economy.
Fixing housing market dysfunction
Canada’s housing market is in a state of structural crisis, driven by the collision of explosive population growth and a sclerotic, municipally fragmented development system. Home prices have increased by approximately 120 percent since 2007, while incomes have stagnated, making Canada one of the most unaffordable housing markets in the OECD.
This persistent divergence underscores the structural nature of Canada’s affordability crisis. This affordability collapse is rooted in a failure to deliver adequate supply, especially in major metropolitan areas, where restrictive zoning, high development charges, and complex permitting processes obstruct the rapid construction of new units. To reverse this dysfunction, governments must confront three interlinked constraints: regulatory obstacles, demographic pressures, and the scale of development.
First, a bold provincial intervention is required to break through local resistance to density, such as a provincial “right-to-build” policy that would override exclusionary zoning on all serviced, residential land—guaranteeing automatic approvals for buildings up to six storeys, without parking mandates or costly discretionary reviews. Such a policy would eliminate bureaucratic delays, encourage modular and prefabricated construction, and allow builders to scale across regions. In doing so, it would mimic the Japanese housing model, where liberal land-use rules and consistent approvals have enabled steady homebuilding and price stability for decades.
Second, density must be legalized far more broadly and forcefully. As Mike Moffatt and Cara Stern explain, provinces should mandate that municipal Official Plans align with credible population forecasts, requiring upzoning around transit corridors and legalizing missing-middle housing by default. By abolishing outdated minimum parking requirements and allowing multi-unit homes on most urban lots, governments can reduce land speculation and enable faster, cheaper construction in areas already served by infrastructure and services.
The chart below illustrates this demographic shift, with the number of net non-permanent residents rising dramatically from under 200,000 before 2022 to nearly 800,000 in 2024.
Finally, immigration policy must be calibrated to reflect housing realities. Statistics Canada reports that the population of non-permanent residents grew from approximately 1 million in 2022 to about 3 million in 2025. This increase has intensified pressure on a rental market already in short supply. As a temporary but essential step, scaling back non-permanent resident intake to 2022 levels would give cities time to build the units required for long-term population growth, while allowing integration and labour matching systems to catch up.
Only through coordinated reforms—across zoning, density, and demand-side demographic management—can Canada begin to resolve its housing affordability crisis.
Key takeaways
Canada’s economic challenges are neither isolated nor transient—they’re interlocking structural weaknesses demanding urgent and coordinated reform.
The OECD’s latest assessment leaves little room for complacency: stagnating productivity, fragile trade architecture, and a housing market in collapse are actively eroding the promise of shared prosperity.
For too long, Canadian policymakers have relied on headline GDP growth and immigration-driven population gains as proxies for success. But as real output per capita declines and affordability craters, the gap between growth and well-being has become impossible to ignore.
Fixing this requires more than tinkering. It demands a serious national effort to revamp tax policy, retool immigration to meet labour and housing capacity, liberalize internal trade, and break through zoning obstruction that throttles supply.
The goal isn’t simply to recover lost ground, but to rebuild an economy that once again rewards effort, investment, and innovation. Prosperity must be rooted in productivity, not population.
With the right blueprint—backed by political will and intergovernmental cooperation—Canada can reverse its drift toward stagnation and reclaim its status as a place where ambition, affordability, and opportunity are all in harmony.
The cost of inaction is steep. But the upside of decisive, coherent reform is nothing short of generational renewal.
