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It was a shocker when the report came out on Friday showing that U.S. GDP grew at an annual rate of 3.2 per cent in the first quarter of 2019 — almost a point higher than forecasted. Much of that increase is due to improving labour productivity growth; it accounted for roughly two-thirds of growth compared to the same quarter last year and is now at least a point higher than it has been over the past decade.

All of this spells good news for Canada, which benefits from the surging U.S. economy. But we should also be asking why the U.S. is delivering great growth while Canada continues to muddle along at what the Bank of Canada projects will be a tepid 1.2-per-cent GDP growth this year. Why can’t Canada get growth up to three per cent?

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Most predictions for the U.S. assumed the so-called “sugar high” from 2018’s tax reform package — and the one-time impact of tax cuts on aggregate demand — would have fizzled out by the end of the year. However, this “demand” view of economics misses out supply-side effects that are now being realized as reductions in regulatory and tax costs start to take hold. With better incentives to invest, conditions are being put in place for more hiring and spending, which is reflected in the latest GDP growth numbers (U.S. business investment grew seven per cent in 2018, although residential investment is showing less strength).