Market News

By Daniel Johnson

An upcoming publication from the C.D. Howe Institute says pro-growth reforms are needed to address low business investment that has been falling in Canada since 2015, weighing on productivity and living standards.

The report, authored by the C.D. Howe Institute’s president and CEO William Robson and research officer Mawakina Bafale, was seen by BNNBloomberg.ca and is set to be released publicly on Thursday.

Noted in the publication was the longstanding divide between investment per available worker in Canada versus the U.S., which “narrowed from the late 1990s through the early 2010s, but has since widened to a chasm.”

“In 2024, Canadian workers will likely receive only 66 cents of new capital for every dollar received by their counterparts in the OECD (Organization for Economic Co-operation and Development) as a whole, and 55 cents for every dollar received by their U.S. counterparts,” the report said.

The report highlighted that business investment and productivity are closely aligned as productivity increases spur opportunities and “competitive threats” that incentivize firms to invest, which in turn increases productivity by providing workers with better tools.

“Investment per worker that is lower in Canada than abroad tells us that businesses see less opportunity in Canada and prefigures weaker earning growth and living standards than elsewhere,” the report said.

“We need pro-growth reforms to stimulate business investment and prevent Canadian workers from being relegated to low value-added activities compared to workers in other countries.”

Canada’s gap regarding gross domestic product (GDP) per person relative to the U.S. has also grown, the report noted. Per capita GDP in OECD nations has “significantly outpaced Canada’s,” which according to the authors implies Canada is moving to become less attractive for talented people to reside.

Late last month, Canada’s second-quarter GDP figures revealed that GDP per capita fell for the fifth consecutive quarter.

“The links between investment and productivity make recent figures on Canada’s capital stock and new investment worrying. Canada’s capital stock has grown so little since 2015 that capital per member of Canada’s labour force has been falling,” the report said.

Levels of business investment per available Canadian worker had been moving toward comparable levels with the U.S. and other OECD peers starting in the early 2000s but that trend ceased in 2015, according to the C.D. Howe Institute.

“Canada’s relative performance then plummeted during the COVID-19 pandemic and has lagged badly since,” the authors said in the report.

Causes and responses

Some possible reasons for Canada’s relatively poor levels of business investment and productivity included in the report were a bias in Canada toward residential construction and a hostile regulatory environment toward the nation’s fossil fuel industry since 2015.

Other reasons cited for the lack of investment were U.S. tax reforms in 2017 that worked to lower investment in Canada and threats of protectionism in the U.S.

“The prospect that Canadians will find themselves increasingly relegated to lower value-added activities relative to U.S. workers and elsewhere should spur Canadian policymakers to action,” the authors argued in the report.

“Current weakness in Canadian business investment compared to the past and compared to other countries is a threat to Canada’s prosperity and competitiveness.”

In order to fix the issue, the authors say action is needed in the form of better tax and regulatory policies as well as economic policy to be focused on longer-term growth.