MNI INTERVIEW: Canada's Investment Slump Is Beyond Intangible

Canadian business investment has been in a long nosedive that shows little sign of reversing, a federal statistics office researcher told MNI, a trend that could make it harder for the central bank to lower interest rates over time.

Investment per worker has dropped 20% from 2006 to 2021 according Statistics Canada's Wulong Gu, the latest in his series of papers seeking to learn why Canada has fallen behind the U.S. economy in particular. Large companies are leading the cutbacks, while the creation of smaller competitive new firms has also declined in recent years, he found.

Companies are spending more on "intangible" products like computer software or corporate branding, and while StatsCan and other agencies have a hard time measuring those expenditures, the decline in traditional investment is the dominant force at work, according to Gu's research.

“Even if we try to capture, much broader, those intangibles, the investment is still bad,” he said in an interview.

DECLINING COMPETITIVE INTENSITY

Weak investment confounds decades of policies seeking to boost competitiveness from signing free trade agreements with the U.S. and the EU to setting the G7's lowest marginal tax rate on new investment. Prime Minister Justin Trudeau has turned to subsidies for green energy projects, while the BOC says one reason it's cautious about cutting rates is a mismatch between falling productivity and 5% wage gains. (See: MNI INTERVIEW: Aggressive Wage Bargaining To Extend BOC Hold)

“There is more evidence to suggest there is decline in competitive intensity,” Gu said.

Politicians have also pledged an overhaul of federal competition law in reaction to public anger over price increases at grocery stores and mobile phone bills, industries dominated by a few companies. Other research shows information and cultural services as an industry at the heart of Canada's competitive weakness, Gu said. (See: MNI INTERVIEW: Canada Budget Neglects Investment -CD Howe)

Falling entry rates of new firms account for 30% of the reduced investment per worker since 2006 according to Gu's research. The evidence suggests a link between reduced competition and lower investment, though Canada isn't alone in having these problems, he said.

CANADA'S FALL MORE PRONOUNCED

Canada has lost ground to China and Mexico in exporting products to the United States. Some experts like former BOC Governor Stephen Poloz have said that, over time, revisions show Canada's productivity gap is smaller than thought and the adoption of digital technology isn't being fully captured.

The BOC probably believes there will be some narrowing of the productivity gap with the U.S. economy, helping set the stage for rate cuts in Canada this year, CIBC economists wrote in a research note on Friday.

Worker productivity in Canada grew at a 0.9% pace from 2006 to 2021, far behind the 1.7% rate from 1990 to 2006, according to Statistics Canada.

“Every other major economy has experienced a decline in investment, but Canada’s decline is much more pronounced,” Gu said.