Macroeconomic policies are becoming less expansionary. Some monetary policy stimulus has already been withdrawn, but with the economy operating close to potential and core inflation near the mid-point of the official target band, further interest rate increases will be needed. Similarly, the overall fiscal stance is set to become less stimulatory.

GDP growth is projected to remain fairly robust (Figure B). Private consumption gains are set to slow as interest rates rise further, house price appreciation eases and job growth moderates. Rising interest rates and the US corporate tax cut will hold back investment. Export growth has been held back by exchange rate strength but is underpinned by improving global demand.

The greatest uncertainty in the outlook relates to increased global trade restrictions. Outcomes will depend on political decisions, notably in the United States, but the associated uncertainty may be dampening Canadian investment. Termination of the North American Free Trade Agreement (NAFTA) would have a small but material effect (around -0.5%, but with considerable uncertainty) on GDP. The other major risk is a disorderly housing market correction, which would reduce residential investment, household wealth and consumption.

In recent years, house prices have soared in the major fast-growing centres of Toronto and Vancouver, which face supply constraints (Figure C). They have outpaced incomes and rents, driven by low interest rates, population growth, foreign buying and speculation. However, national house price appreciation has eased since mid-2017 following federal and provincial policy measures.

Household debt has expanded alongside house prices, exceeding 170% of disposable income. Debt-servicing costs have been held down by low interest rates but could reach levels not seen since at least 1990 with projected policy rate normalisation. Highly indebted new borrowers are particularly vulnerable and are disproportionately likely to be young, living in Toronto or Vancouver and to have lower incomes than other recent mortgage borrowers.

A series of macro-prudential measures since 2008 have mitigated housing market risks. Federally and provincially regulated institutions operate side by side in mortgage markets, which makes close coordination important in monitoring the effects of recent tightening and in preparing to act further as circumstances change.

Unaffordability and affordable housing shortages raise inclusiveness issues. Homelessness is high, and the stock of social housing is low relative to other high-income OECD countries. Waiting times for social housing are as long as 14 years for recent applicants in urban, high demand regions of Ontario, for example. The CAD 40 billion National Housing Strategy seeks to address these problems through construction of new social and affordable housing units, repair or renewal of existing units and provision of housing allowances directly to households.

The federal government is working hard to improve female labour market outcomes. Greater-than-planned improvements in access to high-quality, affordable early childhood education and care would support women’s participation and child development, particularly for those from disadvantaged backgrounds. It would also help to address the sizeable gender earnings gap, which is particularly large for Canadian mothers. The introduction of non-transferable parental benefits and leave for the second parent (usually fathers) announced in the 2018 federal budget should also help reduce that gap.

Initiatives underway to improve labour market information offer benefits especially for youth and could increase productivity by reducing the high rate of qualification mismatches. The Labour Market Information Council should build on the national Job Bank website to provide school leavers and existing workers with detailed, nationally consistent information.

Later retirement can be supported through flexibility in working hours and skills development. The age of eligibility for public and basic contributory pensions has remained fixed despite steadily rising life expectancy, holding back seniors’ labour force participation. It should be indexed to such increases.

Immigrants earn less than the comparable native-born, but the gap shrinks as they spend more time in Canada. Controlling for relevant characteristics, the initial earnings of male immigrants fell sharply in relation to those of the native-born until the early 1990s and then probably remained too low for catch-up to occur during most immigrants’ working lives (Figure D); similar trends are observed for female immigrants. Major causes of the fall include a deterioration in official language skills and in returns to foreign work experience.

Immigration policy has been changed to select immigrants with better earnings prospects. More are selected for their human capital, and greater weight has been given to official language competence, age (inversely related to foreign work experience) and Canadian work experience. Further changes that give extra weight to factors that affect the likelihood of immigrants finding good job matches would help to narrow the earnings gap.

Canada has an extensive array of programmes that facilitate integration. The Targeted Employment Strategy for Newcomers facilitates foreign-credentials recognition and helps immigrants gain Canadian work experience in their profession. Bridge programmes, which help with post-secondary credentials recognition in regulated occupations, and mentoring programmes, which help immigrants overcome underrepresentation in high-quality jobs by developing professional networks, have proved effective and should be expanded. The federal government’s settlement programmes are extensively used, especially by immigrants with the greatest barriers to integration, but it is not clear whether utilisation patterns reflect differences in needs or availability. There are large differences in efficiency of government language programmes, pointing to possibilities for reorganisation to improve outcomes. Private management of government-assisted refugees is being trialled to see if it yields better results.

Hourly labour productivity continues to lag behind the upper half of OECD countries (Figure E). Disappointing productivity performance reflects low growth in both capital intensity and multifactor productivity.

Implementing past OECD recommendations would increase productivity. Barriers to entry in network and services sectors should be reduced as should non-tariff barriers to internal trade. The innovation framework would benefit from focusing measures on correcting market failures. And the tax system should be reformed by reducing the reliance on taxes with high efficiency costs and phasing out tax expenditures not warranted by clear market failures or equity objectives, such as the preferential small business corporate tax rate.

The authorities are rightly putting more resources into infrastructure investment, but good project selection will be critical. The Canada Infrastructure Bank offers potential gains from access to private technology and innovation, enhanced incentives for project delivery and increased efficiency through user charging. However, rigorous cost-benefit analysis has been lacking from recent large public infrastructure projects in some jurisdictions. It will be important for the Bank to develop robust selection processes.