Investment in Canada has fallen steadily since 2014, with a total decline of almost 18 per cent. Once the strongest in the G7, it has been the weakest over the past four years, writes Philip Cross in the Financial Post.

By Philip Cross, March 1, 2018

There is no clearer sign that Canada’s long-term economic prospects are diminishing than yet another drop in business-investment intentions. But that’s exactly the dismal news delivered by Statistics Canada’s annual survey, released Wednesday. The steady erosion of business investment in the country, even as it strengthens in the U.S., offers a blanket condemnation of our federal and provincial policy trajectories.

Investment in Canada has fallen steadily since 2014, with a total decline of almost 18 per cent. Once the strongest in the G7, it has been the weakest over the past four years. This latest decline will surprise the Bank of Canada, whose own most-recent survey revealed “broad-based positive investment intentions” returning investment “back to near post-recession highs.” Why are the two reports so different? The Bank of Canada’s covers 100 firms; Statcan’s includes about 25,000.

Alberta led the decline in investment. Some of the weakness reflects the winding up of several oilsands projects that made investment there appear slightly better than it should have. Now that they’re complete and no new plants are coming, oilsands investment is at its lowest level on record, below even the worst of the 2009 recession. More revealing is that capital spending plans in the conventional oil and gas industry also show a significant decline of seven per cent, confirming the stories that drilling rigs are heading south to the more hospitable U.S. investment climate.

Investment plans in B.C.’s oil and gas industry also fell, as governments endlessly delay the approval of projects ranging from LNG terminals on the west coast to pipelines to export energy overseas. Instead of being a source of strength, spending on pipelines in Canada will fall by nearly $1 billion in 2018, which is a national disgrace. Meanwhile, investment spending by the oil and gas industry in the U.S. has been helping lead their recovery of business investment. As a result, the U.S. is poised to become the world’s largest oil producer in 2019 while Canadians are stuck endlessly and pointlessly debating the existential meaning of fossil fuels.

The steady erosion of business investment is a blanket condemnation of our policies

And in Central Canada, business investment, having declined last year, plans to stay there — flat. Firms remain reluctant to invest in Ontario, which is hardly surprising given the array of government policies that signal its indifference if not outright hostility to the business community. The only pockets of strength were government-directed increases in utilities and urban transit, which in Statcan’s classification appear in the business sector. Ontario’s total investment numbers were inflated by an 11-per-cent surge in government capital spending as the Wynne administration tries putting lipstick on Ontario’s investment pig during an election year. The Quebec government is adopting exactly the same tactic as it too prepares to face the electorate, proof that bribing people with their own money never goes out of political fashion. For the same reason, expect a sudden flood of federal government infrastructure investment in 2019.

There are other signs, beyond just investment, of a worsening climate for business in Canada compared with the U.S. Since October 2016, the Toronto Stock Exchange has lagged U.S. stocks by 25 per cent. Partly, that reflects the negative impact of policies hindering resource development in Canada: Our oil sector trails U.S. oil stocks as the discount for Canadian oil widened in the absence of new pipelines. But technology stocks are not taking up the slack, remaining a very small part of the Toronto market compared with their huge presence on U.S. exchanges. Canada’s economy remains shaped by our historic comparative advantages in long-distance transportation, communications, finance, conventional energy and resource-based manufacturing. Only politicians and special interest groups are capable of deluding themselves into believing these can simply be replaced by technology and green energy.

It’s as naïve as that other fantasy that followed the election of Justin Trudeau: That being slightly cool and not being Donald Trump was enough to make Canada attractive to both immigrants and capital. That never panned out; there has been no flood of disenchanted skilled workers from the U.S. to Canada, but capital is flowing the other way. Turns out both people and firms make very practical calculations about where to locate. After-tax incomes and the freedom to innovate count for more than political virtue signals.

The continuing slump in business investment is important for a number of reasons. Obviously, it depresses current spending in the economy and limits job growth. In the longer term, it reduces potential growth and long-term productivity gains. Most importantly, in the current economic environment, persistent weakness in investment means that the Bank of Canada cannot wean the economy from its addiction to debt-fuelled growth in household and government demand by shifting to exports and business investment.

Making this shift from debt-dependent spending is one condition the Bank of Canada wants before it feels it can safely begin to normalize interest rates. The longer it takes, and the longer the bank waits to raise interest rates, the greater the risks that Canada’s debt will continue to grow, increasing the downside risks when rates rise or credit availability declines. The Bank of Canada must have been relieved to hear from its own surveys that business investment was improving. It should worry now.

Philip Cross is a Munk Senior Fellow with the Macdonald-Laurier Institute

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