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Weak Business Investment Threatens Canadian Prosperity

by William B.P. Robson and Mawakina Bafale

Series:Commentary No. 625
ISBN 9781989483909
Publication year: 2022

Cdn: $12.00; US: $12.00
Language: English
20 pages
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Recent high inflation shows starkly that the Canadian economy's ability to produce goods and services is not keeping up with surging nominal spending. One key suspect in the economy's disappointing ability to produce is a declining stock of business capital per available worker – that is, member of the labour force. Business investment in Canada has been weak since 2015 – both in areas of traditional strength, such as non-residential and engineering structures, and in areas we look to for innovation and future productivity: machinery and equipment (M&E) and intellectual property products (IPP).

Comparing investment in Canada to that in the United States and other OECD countries reveals that, before 2015, Canadian businesses had been closing a long-standing gap between investment per available worker in Canada and abroad. Since 2015, however the gap has become a chasm. Business investment and productivity are closely related: productivity growth inspires investment by creating opportunities, and investment drives productivity growth by equipping workers with more and better tools. Having investment per worker much lower in Canada than abroad tells us that businesses see less opportunity in Canada, and prefigures weaker growth in Canadian earnings and living standards than in other OECD countries.

Recent economic policies in Canada have hurt business investment in several ways. Governments' own consumption of goods and services (including compensation of employees) and transfers to households raised the share of consumption and housing in GDP to unprecedented levels, reducing the resources available for nonresidential investment. Concerns about unsustainable debt and rising taxes undermine confidence. Regulations currently in place, together with expansive but uncertain plans for more – notably affecting energy production and use – make Canada less attractive to investment than it could be. Changes of direction, particularly at the federal level, are needed for Canadian workers to get more of the tools they need to thrive and compete.

William Robson took office as CEO of the C.D. Howe Institute in July 2006, after serving as the Institute's Senior Vice President since 2003 and Director of Research from 2000 to 2003. He has written more than 260 monographs, articles, chapters and books on such subjects as government budgets, pensions, healthcare financing, inflation and currency issues.

Mawakina Bafale is a Research Assistant at the C.D. Howe Institute.
Cdn: $12.00; US: $12.00
C.D. Howe Institute / Institut C.D. Howe BookID: 129733 Added: 2022.10.29