Open this photo in gallery: A decommissioned pumpjack sits idle at an oil and gas well near Carstairs, Alta., on April 1.Jeff McIntosh/The Canadian Press Charles St-Arnaud is chief economist at Alberta Central. The following is adapted from a recent report by the financial institution. Many observers have noted Canada’s underperformance in terms of GDP per capita relative to other industrialized countries since 2015, a period often referred to as “the lost decade.” However, little effort is put into analyzing the source of this mediocre performance, and without understanding the cause, it is difficult to provide solutions. This period should be called “the lost decades” – plural – as Canada’s slide into economic mediocrity started well before 2015. Having followed an almost identical upward trend since the early 1990s, GDP per capita in Canada and the United States started to diverge at the end of 2014. The timing of this break coincides with the drop in oil prices in late 2014 and the collapse in capital expenditure in the oil and gas sector that followed. Looking at the composition of GDP and the drivers of the relative GDP per capita performance between Canada and the U.S., we reach a crucial observation: The oil boom that ended in 2014 obscured the mediocre performance of the rest of the Canadian economy, particularly in manufacturing. Between 2000 and 2014, the investment boom in oil and gas would have led to an outperformance in Canada’s GDP relative to the U.S. However, continued subpar performance in exports and in the manufacturing sector fully offset this outperformance, leaving Canada’s GDP per capita to evolve in line with that of the U.S. Since 2014, the collapse in oil and gas has meant the industry gradually became a drag on Canada’s GDP, while the underperformance of other sectors continued. Moreover, slower disposable income growth led to an underperformance in household spending. This situation left the non-energy sectors unable to drive Canada’s prosperity. To understand how to boost Canada’s prosperity, it’s crucial to recognize 1) why GDP-per-capita growth never really came back, remaining subdued despite favourable oil prices in recent years and 2) why the non-energy sectors have seen such mediocre performance over the past two decades and a half. The lack of rebound in GDP is a result of a lack of oil and gas investment in recent years. That is not unique to Canada. Globally, oil and gas companies are returning a greater share of their revenues to shareholders and reinvesting a smaller share in their operations. The situation suggests a global shift in shareholders’ preferences is likely the main reason for the sector’s lack of investment rather than Canadian-specific factors. And a lack of investment translates into a lack of growth for the sector and beyond. In terms of the non-energy sectors, a lack of competitiveness is likely the main culprit for their poor performance. Chronic underinvestment over multiple decades is the cause of weak productivity performance in Canada. Canada spends almost as much on home renovations and homeownership transfer costs (non-productive investment) as it spends on machinery, equipment and intellectual property investment (productive investment). More importantly, there is evidence that household borrowing over the past 30 years has crowded out business investment. These issues with the resource and non-resource sectors during a commodity boom suggest the Canadian economy may have suffered from “Dutch Disease,” when outperformance of a single commodity raises the currency, harming exports and thus the overall economy. However, globalization may have played a much bigger role in the underperformance of the manufacturing sector, especially in light of weak competitiveness. To solve Canada’s economic problems, policy makers must consider how to make the non-energy sectors competitive again. This will involve ensuring businesses have the incentives and the resources to spend on productive investment and enhance their competitiveness. In the energy sector, with weak investment due to global factors, eliminating or weakening the restrictive regulations enacted over the past decade may not deliver the boom in investment and economic prosperity that some are hoping for. However, loosening those regulations must still be done, because they negatively affect other sectors, especially infrastructure investment, which Canada desperately needs for its prosperity.