Sounding the alarm on productivity
When the Deputy Governor of the Bank of Canada, Carolyn Rogers, says publicly that low productivity in Canada represents an “emergency,” obliging us to “break the glass,” you know we have a serious problem. Too bad her diagnoses and prescriptions only nudged the glass, offering tactful central bank generalities, not stern prescriptions for reform. To her credit, Rogers did suggest that government policy was partly to blame. “Government incentives and regulatory approaches can change from year to year ... companies are naturally wary of regulatory approval processes that can be both lengthy and unpredictable.”
Other observers have been more candid and pointed. Investment commentator David Rosenberg maintains that “the government’s mishandling of the economy and fiscal policy is beyond the pale — declining real per capita incomes in Canada year in and year out.” Massive government spending perpetuated well beyond the pandemic “has continued to crowd out private sector investment” needed to improve productivity rates. Business capital is a paltry eight per cent of GDP, less than half that in the U.S., where productivity growth is running at 2.6 per cent year over year compared with minus 0.6 per cent in Canada. One would think that this alarming trend would be of concern to the Bank of Canada.
Rosenberg attests further that dismal productivity and our declining competitiveness explain why the Canadian dollar is not rising with commodity prices. Canadians, especially those on pensions or fixed incomes, are automatically poorer. It also demonstrates why Mexico has, for two years running, displaced Canada as the top exporter to America.
Economist Jack Mintz indicates that real GDP per capita has stalled since 2018, fell in 2023 by 2.4 per cent and will likely fall again this year. Incomes are falling behind other countries, notably the U.S., our most important competitor for investment, entrepreneurs and skilled workers.
Goldy Hyder, CEO of the Business Council of Canada, warned that government inaction on spending restraint and on reforms for the approval of major energy and mining projects have undermined Canada’s performance. Ottawa says it wants Canadian businesses to invest in Canada but warns that returns on those investments, that is profits, may be capped. Hyder concluded, “Without profits, there are no companies and without companies, there are no jobs. It is that simple.”
As Carolyn Rogers noted in her recent speech in Halifax, “Back in 1984, the Canadian economy was producing 88 per cent of the value generated by the U.S. economy per hour. That’s not great. But by 2022, Canadian productivity had fallen to 71 per cent. Canada also fell behind all our G7 peers, with only Italy seeing a larger decline in productivity relative to the U.S.”
Canada has relied for decades on our resource sector as a major engine of growth. Permitting processes take forever and we consistently reject growth opportunities. When the leaders of Germany, Japan, and most recently Greece, asked for LNG exports, they were rebuffed on the grounds that there is “no business case for such exports,” a point the U.S. proves blatantly false. Drillers across the U.S., which still has no carbon tax, broke production records last year, collectively selling more LNG on the global market than any other country. And we wonder about our declining competitiveness?
WITH LESS AVAILABLE CAPITAL, BUSINESS INVESTMENT SUFFERS.
Ironically, as power demand surges to keep pace with demand for new data centres, digital medical records, AI and battery plants for EV production, many North American utilities are turning to fossil fuel energy as the only reliable way to meet peak demands.
Like LNG, critical minerals are fundamental to the transition to a green economy, yet here, too, the government’s approach has been tepid at best.
It has been unwilling to directly support Canadian mining companies or major mining projects in Canada, offering only rhetoric about streamlining protracted approval procedures.
In contrast, note the recent announcement by Perpetua Resources, a Canadian company with a large critical minerals resource in Idaho, of up to US$1.8 billion in funding from the U.S. Export-import Bank.
The most significant reason for low productivity in Canada is a lack of investment in businesses and capital stock. Last week’s federal budget will only compound the problem and discourage needed investment. Two other persistent causes are: Canada’s financial system — a highly concentrated bank oligopoly, which is
nd not focused on business lending, notably to the small and mediumsized firms that employ 65 per cent of Canadians; and a pension/ registered savings system that has unlimited rights to invest anywhere in the world.
Before 1990, Canadian pension funds needed to invest 90 per cent of their assets in Canada. The government mistakenly eliminated this requirement and, in 2023, 75 cents of every dollar was invested outside Canada. If our major pension funds see less value from investing in Canada why should the private sector decide otherwise? Given that pension funds are highly subsidized government creations, government has the authority and economic imperative to regulate them to serve Canada’s economic interests. Why should Canadian taxpayers underwrite economic growth in China or the U.S.?
With less available capital, business investment suffers, and company growth is stunted. One solution would be to reintroduce a prescribed “invest in Canada” requirement, possibly with additional incentives, for any pools of savings in Canada that receives a tax benefit in Canada.
The lack of competition in Canada’s banking sector is a deep-seated problem. Various revisions to the Bank Act that eliminated barriers Canadian banks faced domestically have exacerbated the financial services oligopoly. Unless authorities enforce the Bank Act prohibition on oppressive, tied-selling tactics, smaller investment banks will struggle to survive. Some that grow significantly are inevitably acquired.
The U.S. has historically been far more willing to intervene to ensure competition and systemic stability. In Canada, with the Office of the Superintendent of Financial Institutions and the Canada Mortgage and Housing Corp., the banks have implicit guarantees backstopping huge swaths of their businesses.
Bank supporters say the Canadian market is different because it is considerably smaller, but a protective regulatory cocoon risks making it even smaller.
Since Canadian banks are increasing their stake in the U.S. market, it may be time to allow some U.S. banks to compete in the cosseted Canadian market.