Is AI the Fix for Canada’s Economy?

The Canadian economy has gone through a tough period. Slower recovery from the pandemic than many countries around the world, combined with high inflation rates have severely impacted many Canadians.

In this blog, we take a look at the current economic realities Canada is facing, and consider the impact AI could make.

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Canada’s economic situation

After a tough period, the Canadian economy has avoided a recession, with GDP up in the last quarter of 2023, from where it was a year before. According to financialpost.com, this was “primarily due to higher exports of crude oil and reduced imports”. This was a very solid recovery, given the original projections were for a 0.8% increase in the final quarter, and the third quarter was actually a 0.5% decrease. After the contraction that resulted from the COVID-19 pandemic, Canada’s economy has now grown in each of the last three years, albeit not significantly.

But the situation is far from perfect. Domestic demand dropped slightly in the fourth quarter of 2023. Andrew Grantham, an economist at CIBC Capital Market summarised the situation: “Growth appears to have been driven largely by an easing of previous supply constraints helping exports and car sales, rather than necessarily an improvement in domestic demand”. This suggests improvements still need to be made on the domestic front.

After all, with the exception of the COVID-impacted 2020, last year was actually Canada’s slowest GDP growth rate since 2016, at just 1.2%. Higher interest rates, significant inflation, spikes in drought and forest fires were all factors that influenced the disappointing number. Unfortunately, there was a contraction in the goods-producing industries, with almost all sectors posting declines. Whilst mining, quarrying, and oil and gas extraction were all exceptions, this was not enough to avoid the contraction. In keeping with the previous two years, value was again added to service-producing industries, such as transportation, warehousing, scientific and technical services. But this increase was not as high as 2021 or 2022.

The situation is impacting Canadians. According to theconversation.com, 84% of Canadians believe the country is in a recession, while 73% are anticipating a recession in 2024. But concerns go well beyond recession.

Outside of those on the highest incomes, net savings have deteriorated for Canadians, especially for renters and lower-income families, who spend large portions of their earnings on necessities. To put the situation into perspective, of all the G7 countries, Canada holds the highest amount of household debt as a percentage of disposable income. The current high interest rates could make this situation even more difficult for lower earners.

Then there are housing costs. When prices and wages are taken into consideration, housing is less affordable in Canada than at any stage in the last 40 years. The growth in housing prices and mortgage rates is currently outpacing wage increases, meaning home ownership is becoming less and less possible for a growing percentage of Canadians.

AI Could Help Grow the Canadian Economy

Nonetheless, there might be an opportunity for a significant boost to the Canadian economy.

After a period of significant technological development and adoption, it seems Canada is ready to fully embrace Artificial Intelligence (AI). Sabrina Geremia argued that the adoption of new technology is now “embedded” in Canada’s DNA. She went on to explain the following:

With Canadians using Google an average of four times per day, Geremiah believes they are ready to embrace AI, which she describes as “the next tech frontier”. With Google’s core platforms already being powered by AI, Geremiah says AI “offers radical potential for exponential growth”. This potential, according to Geremiah, could lead to an increase in $210 billion and save the average Canadian worker more than 100 hours a year.

According to a PwC survey, more and more Canadian companies believe AI will be the key to reinvention and increasing profit margins going forward. Despite this, only 25% of Canadian CEOs surveyed believe economic growth will improve in 2024. Nonetheless, 36% of Canadian CEOs surveyed say they have adopted AI technology in the last 12 months, with some hesitance from others for a variety of reasons, such as cybersecurity, misinformation, legal risks, reputational risks and bias. In many cases, those who wish to adopt the technology are turned away presently by budget constraints, upskilling requirements and operational inefficiencies.

A majority of Canadian CEOs believe AI will require three years of significant upskilling, which would be a weighty investment. Of course, many businesses are in a bind as a result. For some, the investment would be beyond budgetary limitations, while others would fear for their future if they fail to adapt to the evolving environment. Either way, an increase in productivity is required after a decades-long decline in productivity.

The Conference Board of Canada believes the correct deployment of AI could lead to an additional 2% to Canada’s GDP. Alain Francq, Director, Innovation and Technology at The Conference Board of Canada, explained that “Canada is a leader in the discovery and creation of artificial intelligence, but we lag in adopting the technology at the organisational level.” She added that “To take advantage of generative AI’s potential, Canadian businesses need to break out of their historic pattern of under-investing in research and development and adopting emerging technologies in an effort to rectify the country’s productivity gap.”

That potential is massive. A recent report by Microsoft found that AI could generate $187 billion dollars of value for the Canadian economy by 2030.

Clearly, AI has a lot of potential in Canada, especially given the country is a leading developer of the technology, but more adoption of the technology could mean better outcomes for companies and the economy. As Krista Jones, Interim CEO and Chief Delivery Officer at MaRS Discovery District, has said: “Our AI ventures have technologies with the potential to be impactful on the global stage and transformative for the Canadian economy, but only if we can achieve adoption from businesses at scale.”

Conclusion

Broadly speaking, there are no quick fixes for entire economies. Steady GDP growth in Canada in the final quarter of 2023 was a positive sign, but skyrocketing inflation and interest rates are still major issues.

AI is growing and improving all the time. It remains to be seen to what extent Canada embraces the rapidly evolving technology, but it seems certain that there are tremendous economic opportunities for companies that utilise AI effectively.

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