As we emerge from the COVID crisis, attention is shifting to the economic recovery. How quickly can Canada’s economy grow, replace lost jobs, raise incomes, and support government programs and suddenly higher public debt?
A critical growth driver is business investment. Capital spending on buildings, engineering infrastructure, machinery and equipment, and intellectual property creates demand as it occurs. Even more important, once complete, the buildings, infrastructure, machinery, R&D and software equip workers with the tools they need to produce, compete and earn higher wages.
Unhappily, GDP numbers released Tuesday by Statistics Canada reinforce a bleak message from recent C.D. Howe Institute research. We now have data on the fourth quarter of 2020, and the picture for the full year is one of extreme weakness. In real (price-adjusted) terms, investment in non-residential structures was down more than 11 percent from 2019, while investment in machinery and equipment was down more than 16 percent. Investment in intellectual property products, notwithstanding the spur COVID has given the digital economy, was also down, by almost four percent.
Meanwhile, existing capital has been wearing out. Other recent data from Statistics Canada show an outright decline in Canada’s capital stock in 2020 — the first in more than a decade. Canadian workers are starting 2021 much less well equipped to produce and compete than they were. Forecasters, including the Bank of Canada, are marking down their estimates of how fast Canada’s economy can grow in coming years. Lower productive capacity as a result of weak business investment is a major reason.
It is no surprise that investment was weak during a year when COVID curtailed so much economic activity. But 2020 reinforced two ominous trends.
Business investment in Canada has been weak for years. Weak markets and policy obstacles ended a boom in the resource sector that had buoyed investment in non-residential structures before 2015. Canada’s stocks of machinery, equipment and intellectual property products have been lagging growth in the workforce for the past five years as well.
Equally striking, and not in a good way, is that other countries have done better. In the United States, our foremost trading partner and competitor, business investment fell by only a third as much as it did in Canada in 2020. U.S. investment in both non-residential structures and machinery and equipment held up better than Canadian investment did. U.S. investment in intellectual property products actually rose.
Nor is U.S. outperformance in investment a new story. It means the average U.S. worker is increasingly better equipped than her or his Canadian counterpart. Only in non-residential structures does Canada’s more resource-oriented economy give us an edge. For every dollar of that type of new capital the average U.S. worker enjoyed in 2020, the average Canadian worker enjoyed 1.33 cents. But in machinery and equipment, U.S. workers have a bigger edge: for every dollar of new capital the average U.S. worker enjoyed in 2020, the average Canadian worker enjoyed only 41 cents. And in intellectual property products — the R&D and software so central to competitiveness in the digital era — the gap is a chasm. For every dollar of new intellectual property the average U.S. worker enjoyed in 2020, the average Canadian worker got a paltry 24 cents.
What these numbers tell us is that the U.S. is on its way to a faster pandemic recovery than Canada, and that its growth from then on will be more robust.
It does not have to be this way. Investment in Canada was much stronger during the 2000s and early in the 2010s. Capital per worker rose, and the gap between investment per worker in Canada and in the United States and other countries narrowed. More-competitive taxes, less competition for saving from deficit-ridden governments, and more efficient and stable regulation all helped improve businesses’ willingness to spend on capital. Since then, however, businesses have found Canada a less congenial place to invest.
The upshot is that Canadian workers are not getting the tools they need to prosper and compete. Improving that situation should be a top priority for the upcoming federal budget and for governments at all levels.
Published in the Financial Post
William Robson is president and CEO of the C.D. Howe Institute, where Miles Wu is a research assistant.
