When I met Lightspeed CEO Dax Dasilva last month to talk about his latest art project, I slipped in a couple of questions about the economy. Lightspeed specializes in selling point-of-sale technology to smaller companies and restaurants. That means Dasiliva has a unique view of what’s happening on Main Street. 

He struggled to find the right words to describe what the data was telling him. “It feels healthy, if not a bit flattish,” Dasilva said. “It’s not in decline.”

Not in decline. Flattish, but feels healthy. A hot emerging market in the late 1800s that grew some serious muscles in the 20th century, Canada’s economy has entered its “dad bod” phase. 

It’s a good moment for a health check. Inflation and interest rates have made it difficult to get a good read on the real state of the economy. Both are still higher than anyone would like, but the trend has broken in the right direction. Bank of Canada governor Tiff Macklem said this week that his confidence that inflation has been beaten has increased in recent months. That’s the main reason he cut interest rates on Wednesday for the first time since he took over as governor four years ago. 

The main reason, but not the only one. 

When central banks cut interest rates, it’s usually necessary to hold two contradictory thoughts in mind at the same time. The rate cut was good news, but there’s a catch. The other reason Macklem cut interest rates is that the post-pandemic recovery is quickly running out of steam. 

Statistics Canada reinforced that on Friday when it released its latest labour force survey. Hiring stalled in May, and the unemployment rate climbed to 6.2 per cent, almost a full percentage point higher than a year earlier. The employment rate, which measures the percentage of the working-age population that has a job, dropped to 61.3 per cent, the lowest since January 2022 and significantly lower than the 2019 average of 62.3 per cent. 

Pandemic-era savings and phenomena such as revenge travel helped power the economy for a while, but demand destruction from higher prices and elevated borrowing costs were always going to win out eventually. 

Macklem bet there was enough foam on the runway to execute a “soft landing,” cushioning the economy from the inevitable comedown after a sharp increase in borrowing costs followed a long period where credit was essentially free. It looks like he was right. Statistics Canada reported last month that job vacancies dropped to about 610,000 in March, compared with about 1 million in spring of 2022, suggesting employers responded to weaker demand by taking down job postings rather than executing mass layoffs. 

Also, wages have been growing faster than inflation for at least a year, and savings rates are relatively high. Still, a recession remains a possibility, and Macklem wasn’t ready to declare victory this week. “The runway’s in sight,” he said. “We still need to land this.” 

Let’s assume Macklem nails his landing. What are the chances of the economy taking flight again? It could be difficult because the headwinds continue to blow, and there are fewer tailwinds. 

The immigration booster is shot because we learned the hard way that we lack the capacity to absorb an outsized number of newcomers, who might otherwise have helped offset another drag: the retirement of the baby boomers, which will shrink the talent pool. The West’s fight with Russia will unsettle commodity markets, and the rivalry with China will narrow trading opportunities. All those things will put upward pressure on inflation, limiting the number of cuts the Bank of Canada will be able to make. 

It would be a mistake to expect households to lead the charge, as they did after the Great Recession and COVID-19. After piling up debt for more than a decade, many of us are maxed out. While households are wealthier overall than they were before the pandemic, thanks to increases in asset prices and wages, that wealth is concentrated at the higher end of the spectrum—which is problematic because richer households spend less, proportionately, than poorer ones. 

Higher wages will help avoid a reckoning, but inflation and interest rates have taught a lesson that common sense couldn’t: restraint. 

Back to Dasilva. Lightspeed’s data isn’t blah across the board. “We have a lot of Michelin-star restaurants,” Dasilva said. The gross transaction volume, or GTV, of that customer cohort has been growing at a rate of around 29 per cent, compared with around two per cent at Lightspeed’s more mainstream clients. 

However: “When people go out, they are skipping things like appetizers, tapas and tasting menus,” Dasilva said. “They are going for things that they feel are a treat, like pizzas, dessert. They’re skipping alcoholic beverages and doing mocktails and coffees.” 

We should avoid catastrophizing. The economy will adjust to consumers who no longer order an appetizer with dinner, and choose a pizza over the tasting menu. But that’s still a smaller economy, unless we find another way to generate growth. 

The only obvious way to do that is to finally fix the productivity problem. The omens aren’t great. Statistics Canada reported this week that output per hour of work dropped in the first quarter, snuffing out whatever hope was created by an increase in the fourth quarter—the first gain since early 2022 and only the second since the middle of 2020. 

“We’re not competitive,” Dasiliva said.

The national priority should be doing something about that. If we don’t fix the productivity problem, flattish growth will be the most we can expect. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.