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March 28, 2023

From: Mawakina Bafale and William B.P. Robson

To: Canadian Workers

Date: March 28, 2023

Re: The Sorry Sag in Business Investment

A core message in former federal finance minister Bill Morneau’s 2022 book, Where To from Here? is that Canada needs faster economic growth, which requires higher business investment. If Canadian living standards fail to keep pace with those abroad, ever fewer talented people will choose Canada as a place to live and work.

The latest numbers make heeding his warning even more urgent.

In his book, Morneau cites figures from the C.D. Howe Institute showing that business investment per available worker – spending on new capital divided by the labour force – has been lower in Canada than in other OECD countries, especially the United States. He laments that raising investment to spur faster growth is not a priority for the federal government.

The post-pandemic recovery in business investment has been far more robust in the US and other OECD countries than in Canada. Our institute’s most recent cut at the international data was last July. Those numbers, based partly on forecasts from the OECD, estimated that new capital per potential worker in Canada would be less than $15,000 in 2022, compared to $20,000 in other OECD countries and almost $28,000 in the United States (all in $C).

That means that, for every dollar of new capital per worker in other OECD countries, a worker in Canada would get about 73 cents, and for every dollar of new capital per US worker, a Canadian would get only 53 cents – a difference that condemns Canadian workers to slower growth in real wages than their counterparts abroad.

Worse, business investment in Canada is so low that additions to the country’s stock of capital – the total of non-residential structures, machinery and equipment, and intellectual property products – are falling short of what is wearing out and going obsolete. Canada’s stock of capital per worker is therefore actually falling – which implies that Canadian workers may see no growth in real wages and living standards at all and may actually experience a reversal.

The latest news on business investment and capital stock from Statistics Canada puts an ominous exclamation point on the already sobering numbers. Capital spending fell in the fourth quarter of 2022, led by a sharp drop in outlays on machinery and equipment. On a per-worker basis, real business investment in Canada is still below its pre-pandemic level. And the real stock of capital per worker has been on a downward trend since 2015 – a deterioration unlike anything since these measures began.

The fossil fuel industry has faced volatile prices and a hostile regulatory environment since 2015, so we might expect engineering construction – the type of capital most closely associated with fossil fuel production and transportation – to be off the most. Yet that is the area that has held up best: the stock of engineering construction per worker at the end of 2022 was almost the same as at the end of 2015.

The bigger problems lie elsewhere. The stock of non-residential buildings is down by about five per cent. Intellectual property products and machinery and equipment — the types of capital most closely associated with innovation and productivity — are weaker still. Intellectual property products — i.e., software, databases and other intangibles — are down almost eight per cent per worker cent since 2015. Machinery and equipment per worker is the worst, down more than 14 per cent.

A rebound in immigration since the pandemic is boosting Canada’s labour force. Other things equal, more workers means lower per-worker numbers. But the recent declines in investment and capital per worker are not statistical blips. Unless investment increases sharply, they are a sign of things to come. The federal government has announced much higher targets for immigration. Business investment is already too low to maintain the capital stock per worker. If investment does not rise more than proportionately to the growth in the labour force, both newcomers and Canadians already here will lack the tools they need to compete, earn more, and raise their living standards.

Warnings from former finance minister Morneau may not get much of a hearing in Ottawa today. But even if his words do not register, the investment numbers should. The federal government needs to switch course. Debt-financed consumption, populist tax policies, and industrial-policy subsidies are not fostering stronger investment. Nor are ever-changing and expanding regulations in sectors ranging from energy through telecommunications through financial services. Spending and regulating less, and smarter, is the route to stronger business investment – investment Canadians need if they want to escape the low-income trap Bill Morneau warns about.


Mawakina Bafale is a Research Assistant C.D. Howe Institute, where William B.P. Robson is CEO.

To send a comment or leave feedback, email us at blog@cdhowe.org.

The views expressed here are those of the authors. The C.D. Howe Institute does not take corporate positions on policy matters.

A version of this Memo first appeared in the Financial Post.