Canada’s investment recession drags on
While Canada’s economy continues to grind out positive if unspectacular gains in employment and gross domestic product (GDP), below the surface the picture is less encouraging.
For several years, our economy has basically been kept afloat by free-spending consumers and overheated real estate markets. Throughout this period, export growth has been meagre and investment outside of the housing sector has been missing in action.
Indeed, non-residential fixed business investment — defined as the money that companies spend to build or acquire structures, plant, machinery, equipment, intellectual property products and engineering infrastructure — has been on a declining trend since early 2014. Adjusted for inflation, business capital outlays were flat between 2013 and 2014, then fell in 2015 and 2016. Forecasts suggest 2017 will be another negative year.
The collapse of global oil prices, coupled with a weak pricing environment in some other commodity markets, has been a key factor behind Canada’s investment slump. But capital spending has been sluggish in many other sectors, apart from energy and mining. Earlier this year, Statistics Canada released projections for “non-residential capital and repair expenditures” in 2017. In 13 out of 20 industry sectors surveyed, companies reported they plan to invest less in 2017 than they did in 2016, which was itself a poor year.
Adding to the gloom, a recent C.D. Howe Institute report points to a multi-year drop in non-residential business investment measured on a per worker basis. As the report notes, low levels of business investment translate into lower productivity, lower real wages for workers, and a smaller and increasingly outdated capital stock. In 2016, non-residential investment per worker in Canada was well below the average for all industrial economies and only 59 per cent of the figure for the United States.
Canadian policy-makers should be focusing intensely on the problem of subpar business investment, but for the most part they aren’t.
Ontario’s 2017 provincial budget featured a number of big spending commitments but was noticeably short on initiatives to stimulate private sector capital spending.
The federal government’s 2017 budget called for the creation of a new Canada Infrastructure Bank and talked up the role of innovation in driving economic growth. But the budget had little that’s likely to improve the outlook for investment over the balance of the decade. At the same time, Ottawa continues to move ahead with environmental and regulatory reviews touching on project assessments, marine protection and energy infrastructure. While well intentioned, there’s a risk these reviews will lead to more costly and delay-prone regulatory processes for natural resource, transportation and infrastructure projects — putting further downward pressure on investment in these sectors.
There is no magic bullet to quickly reverse Canada’s disappointing investment performance. To promote non-residential business investment, policy-makers should be looking at ways to speed up and modernize regulatory decision-making; reduce the income, sales and property tax burdens on new capital spending; keep energy input costs at reasonable levels; and accelerate the pace at which companies in Canada adopt digital and other advanced process technologies.
Canada also needs to ensure that the renegotiation of the North American Free Trade Agreement doesn’t produce a result that diminishes Canadian access to the $20trillion American market or makes it harder for our companies to conduct cross-border business.