In the early 1980s,
Canada experienced higher inflation, interest rates, and underemployment than the United States did. The
Bank of Canada rate hit 21% in August 1981, and the inflation rate averaged more than 12%. The inflationary period made Canadians seek to protect themselves by investing in the housing market.
Some saw an advantage to high interest rates by
speculation in real estate and other assets. The increase in transactions was financed by borrowing and ultimately caused debt levels to rise.
Canadian firms, preoccupied with prospective investment opportunities because of high inflation, no longer focused on innovation and productivity improvements. In addition, high inflation was partly responsible for larger government spending. The overall tax burden rose from 27% of income in 1951 to 34% in 1969 and 37% in 1988. From 1975 to 1992 national deficit more than tripled to 8% of GDP. The resulting high interest rates caused more Canadian income to be paid out to foreign holders of Canadian public and private sector debt.
Canada changed from a country producing and exporting mainly primary products to one producing and exporting more manufactured goods. Jobs were lost to
mechanization in industry. Moreover,
globalization meant that Canadian firms had to downsize their workforce to stay efficient and compete internationally. In early 1980s, Canada's unemployment rate peaked at 12%. It took almost four years for the number of full-time jobs to be restored. A slowdown in productivity also emerged during the recession. Real GDP declined by 5% between June 1981 and December 1982, and average output per worker slowed by 1%. The US decision to switch to a
floating exchange rate devalued the Canadian dollar, which was worth US$0.85 by 1979, which made US imports more expensive. On the other hand, Canada's major exports declined in price. Combined with high inflation and interest rates, the high commodity prices reduced the
standard of living.
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