Canada’s Next Growth Phase
Morgan Stanley's Arunima Sinha argues that despite near-term headwinds around trade, population growth, and productivity, Canada's economy is positioned for medium-term acceleration through capital deepening and technological diffusion, with potential growth rising from 1.5% to 1.75-2% by the 2030s.
Summary
In this episode of Thoughts on the Market, Arunima Sinha from Morgan Stanley presents a constructive medium-term outlook for Canada's economy, contrasting with recent negative headlines about trade tensions, population growth slowdowns, weak productivity, and chronic underinvestment. Morgan Stanley's report "Canada, the next acceleration" identifies three key opportunities for economic pivot.
First, the speaker explains that Canada's growth model can shift from export-led growth to domestic capital deepening and technological diffusion. This transition would move the economy from being trade-dependent to more productivity-focused, enabling potential growth to rise from approximately 1.5% to 1.75%. However, Sinha notes a significant structural challenge: existing capital pipelines worth over half of announced investments are concentrated in utilities, oil and gas, and transportation—sectors representing only 13-14% of gross value added. These investments emphasize structures over machinery and equipment, suggesting a need to crowd in private investment toward higher-productivity sectors like finance and information services.
Second, despite near-term population growth slowdowns, the longer-run demographic picture remains favorable. Canada's working-age population is projected to grow 3% by 2035, 5% by 2040, and 6% by 2045, while most developed economy peers will experience working-age population shrinkage. This demographic advantage provides Canada a growth window through the 2030s.
Third, the critical test for the next few years involves whether sectoral investment spreads beyond major projects to lift economy-wide productivity. Construction, manufacturing, agriculture, and wholesale trade are identified as especially important due to their machinery intensity, low technology adoption, and significant recent productivity gaps. If these sectors improve, Canada could enter the 2030s with potential output growth approaching 2%.
About this episode
<p>Recent headlines about Canada have focused on trade uncertainty and weak productivity. But our Global Economist Arunima Sinha explains why the country may be on the cusp of a stronger, investment-led growth cycle.</p><p>Read more <a href="https://www.morganstanley.com/insights?cid=mg-SM_CORP-insights-17607" rel="noopener noreferrer" target="_blank">insights</a> from Morgan Stanley.</p><p><br /></p><p>----- Transcript -----</p><p> </p><p><strong>Arunima Sinha:</strong> Welcome to Thoughts on the Market. I'm Arunima Sinha from Morgan Stanley's Global and U.S. Economics teams. </p><p>Today, why Canada's economy may be closer to a new growth phase. </p><p>It's Monday, October 5th at 10am in New York. </p><p>Canada has been in the news recently. There have been lots of headlines related to trade, around population growth, around weak productivity, years of underinvestment. And those are real constraints, and they have weighed on the near-term outlook. </p><p>At Morgan Stanley, we are more constructive on the medium-term outlook for Canada. And we recently wrote a report around this along with our strategists titled, “Canada: The Next Acceleration.” And, from our perspective, we think that the near-term uncertainty around trade is actually clouding the opportunity for global investors. </p><p>There are three points that we make in the report. </p><p>We estimate that the growth model in Canada over the next three to four years can actually pivot from the export-led growth story that we've seen over the past few years into one that emphasizes capital deepening and greater technological diffusion across the economy. </p><p>So, it really is about the domestic build-out and the opportunity in shifting away from trade and export-led growth into a more productive economy – that's not just larger over time but can actually grow at a much faster pace as well. And so, by our estimates, we think that potential growth in Canada could feasibly rise from about 1.5 percent to closer to 1.75 percent. </p><p>The way that we see it, this really doesn't require things to start from scratch. There are already large capital pipelines that are in place. But one of the things that we do note is that a lot of these pipelines are actually concentrated in a few sectors. </p><p>So, about half of these are in utilities and oil and gas, transportation. These sectors together combine about 13 to 14 percent of the gross value add for the economy. But they actually account for more than half of the announced capital pipelines. And so, for the money that's going into the economy – and a lot of this is going into structures – it's not going as much into machinery and equipment. </p><p>And so, while the capital build-out is going to support the widening, we also need to think about crowding in private investment into other sectors. And some of these other sectors that we've identified in the note, such as finance, information services, that have historically had much greater gains in productivity – they would need to see bigger capital intentions as well. </p><p>The other opportunity that we identify for the Canadian growth model is – although the near-term population growth has been slowing, it doesn't actually change the longer run demographic picture. We looked at what the numbers would be for the working age population growth for Canada, taking 2025 as a starting point. And what we see is that Canadian working age population is going to rise by about 3 percent by 2035, by 5 percent by 2040, and 6 percent by 2045. </p><p>Meanwhile, most of the developed economy peers are going to see shrinkage in their working age populations. And so that is really going to give Canada a window into the rest of the 2030s to continue to accelerate its growth model. </p><p>From our perspective, the test for the next few years is going to be whether the investment that's being undertaken in a few sectors spreads beyond the big projects. And it really lifts productivity across the economy. Construction, manufacturing, agriculture, and wholesale will be especially important because they are machinery intensive, technology adoption remains low, and recent productivity gaps are large. </p><p>If those sectors begin to improve, Canada could enter the 2030s with a much stronger growth engine than it has today. And in our perspective, Canada's potential growth could actually pivot from being about 1.5 percent today to entering the 2030s with close to 2 percent in potential output growth. </p><p>Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share our Thoughts on the Market with a friend or colleague today.</p>
Key Insights
- Morgan Stanley argues that Canada's large capital pipelines are heavily concentrated in utilities, oil and gas, and transportation—sectors representing only 13-14% of economic value—rather than distributed across higher-productivity sectors like finance and information services, creating an imbalance in how capital deployment supports broad-based productivity gains.
- The speaker claims that Canada's working-age population will grow 3-6% between 2025-2045 while most developed peers face population shrinkage, providing Canada a structural competitive advantage and growth opportunity unique among developed economies through the 2030s.
- Sinha contends that productivity improvements in machinery-intensive sectors with historically low technology adoption—particularly construction, manufacturing, agriculture, and wholesale—are the critical determinant for whether Canada can pivot from 1.5% to 2% potential growth by the 2030s.
Topics
Transcript
Welcome to Thoughts on the Market. I'm Arunima Sinha from Morgan Stanley's Global and U.S. Economics teams. Today, why Canada's economy may be closer to a new growth phase. It's Monday, October 5th at 10 a.m. in New York. Canada has been in the news recently. There have been lots of headlines related to trade, around population growth, around weak productivity, years of underinvestment, and those are real constraints, and they have weighed on the near-term outlook. At Morgan Stanley, we are more constructive on the medium-term outlook for Canada, and we recently wrote a report around this along with our strategists titled Canada, the next acceleration. And from our perspective, we think that the near term uncertainty around trade…
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