It all comes down to buoyant business investment in the U.S. and weak investment in Canada, writes Philip Cross.
By Philip Cross, June 15, 2018
May brought another disappointing report about Canada’s economy, with the loss of 7,000 jobs, the third decline in five months to bring the total decline since December to 50,000. Slumping employment is consistent with a slowdown in the underlying growth rate of Canada’s GDP to less than 1.5 per cent. And this slowdown is happening in spite of rapid growth in the U.S., which has accelerated to nearly three per cent.
Canada’s economy is falling behind the U.S. on several fronts. Perhaps most striking is the difference in investment intentions for 2018. Statistics Canada found in its annual survey that firms plan to trim investment outlays this year by another one per cent, their fourth-straight annual decline. In contrast, a semi-annual survey of investment intentions in the U.S. found that firms revised up their plans to increase investment spending from a 2.7-per-cent increase just six months ago, all the way up to a 10-per-cent increase in the latest survey. The forecast of an upturn in business investment in the U.S. already is reflected in actual spending, as business investment in the first quarter was up 6.8 per cent in volume from a year earlier, nearly double the increase in the previous year.
It is not difficult to identify the reasons why business investment in the U.S. is improving faster than in Canada. The Trump administration has been unrelenting in signalling its desire to improve the business climate, from reducing regulations to sharply lowering the corporate income tax (its consistency in staying on-message in this area contrasts with its erratic communications everywhere else). Meanwhile in Canada, several jurisdictions are doing the opposite, whether by sharply raising the minimum wage in a short period or blocking the construction of pipelines that have already met all the necessary regulatory approvals.
Overhanging all this is uncertainty about the outcome of the NAFTA renegotiations, an uncertainty that gives firms an incentive to invest in the U.S. over Canada; if talks fail, they have an American beachhead from which to produce for the U.S. market. If talks succeed, they can export freely to Canada across the border. In such an environment, it is not surprising to see the Trump administration resisting and even escalating tensions with Canada, since continued uncertainty may actually favour the U.S. while harming us.
The contrast between buoyant business investment in the U.S. and weak investment in Canada is mirrored in the superior performance of the broader American economy. Compared to that three-per-cent underlying annual rate of growth of real GDP in the U.S., in Canada GDP growth has fallen to half that since mid-2017. It is now lower than before the oil slump began in 2014 despite the addition of large dollops of both fiscal and monetary stimulus.
While jobs in Canada have declined by 50,000 overall since December, the U.S. has added nearly a million new jobs. As a result, measured on the same basis, unemployment in the U.S. has fallen to 3.8 per cent compared with 4.8 per cent in Canada.
Canada’s May job slowdown was particularly pronounced for B.C. and Ontario — provinces, not surprisingly, whose governments have adopted the most anti-business tone. B.C. recently led the nation with projections for four-per-cent job growth by mid-2019, but employment in the past year has essentially stalled (up just a tenth of a per cent) despite continued gains in house construction.
The stall, of course, accompanied the arrival of a new NDP government, whose unrelenting opposition to the Trans Mountain pipeline expansion helped raise the uncertainty surrounding business investment in Canada to the point that the federal government resorted to buying the project to keep it viable.
In Ontario, employment dropped 0.2 per cent since the start of the new year — with the bulk occurring in January when the outgoing Liberals’ drastic minimum-wage hike took effect. Doug Ford’s new Progressive Conservative government in Ontario faces a massive challenge of improving Ontario’s economy after over a decade of higher taxes, ever-greater regulation, soaring hydro costs and ballooning deficits.
But Ford alone cannot change the direction this country is on. Canada’s governments have badly lost focus. They all must return once again to clearly sending the message that Canada is committed to market-based economic growth driven by business investment — and not just the pacification of environmentalists and the redistribution of income away from wealth creators. If they don’t, investors and our most ambitious workers already see an alternative south of the border that looks increasingly attractive.
Philip Cross is a Munk senior fellow at the Macdonald-Laurier Institute.