Canada lagging on business investment — and it’s getting worse, report finds

Capital investments well below average of OECD nations, with gap widening

Canada has a problem with business investment, and it’s threatening our economic competitiveness, according to a new report by the C.D. Howe Institute.

And the trend looks like it’s getting worse.

The report, titled Tooling Up: Canada Needs More Robust Capital Investment, finds that Canadian businesses will make capital investments equal to $13,900 per worker, well below the average of $19,700 per worker across Organisation for Economic Co-operation and Development countries, and even further below the $23,200 in the United States.

The study noted that historically Canada’s capital investment has lagged behind that of our neighbours to the south, but in the last decade we pulled closer to even.

In recent years, the investment gap has been widening again.

“From a forward-looking perspective, if business investment is falling, especially per-worker, it sort of gives you a clue or an indication of the prospects for the economy,” said Jeremy Kronick, associate director of research with C.D. Howe, and one of the authors of the report.

“If workers aren’t receiving the tools to do the work that they’re designed to do, that’s a concern.”

Digging into the details, the data paints a picture of two Canadian economies, with Alberta’s oildriven industry tied to commodity prices and the rest of the country following different fundamentals.

It makes sense that capital investment took a hit around 2014 when the price of oil collapsed, but Kronick said the bigger concern is that the money hasn’t started flowing again as oil prices rebound.

Part of that may be explained by the delays and obstacles facing the Trans Mountain pipeline, Kronick said. “If you’re anyone that is at least tangentially related to the pipeline in some capacity, you’re going to say to yourself, ‘Am I going to bother investing if I’m not sure this pipeline will ever get built?’” he said.

Meanwhile in Ontario, Quebec and the Maritime provinces, C.D. Howe reported that capital investment is running at less than $10,000 per worker this year — less than half of what American companies are investing.

CIBC chief economist Avery Shenfeld said this is an important metric to watch because capital investment is the main avenue for economic growth right now. “Coming out of a recession, there’d be lots of capacity to grow exports without having a new plant open up, but at this stage of the business cycle, if we’re not getting businesses cutting ribbons on new facilities, we’re going to be limited on the amount of headroom we have to grow exports,” Shenfeld said.

Doug Porter, chief economist with BMO, said he’s got some questions about the methodology in the C.D. Howe study, but broadly the metric is worth watching, because it’s a leading indicator.

“We really do have to focus on strengthening competitiveness,” he said. “It is a fundamental building block of economic growth, and if you have relatively weak business investment now, it likely means you’re going to have soft business growth in the future.”

Kronick said that the factors driving business investment are fairly complex, so it’s not easy to point to any one way to make Canada more competitive, but he said that the government should look at reducing electricity prices and taxes to attract more investment.

He also said access to capital may have contributed to the growing gap between Canada and the United States, especially after the global economic downturn when the asset-backed paper market dried up.

Kronick said the same riskaverse banking system that shielded Canada from the worst of the financial crisis is today shielding Canada from getting the most out of the recovery.