Weak business investment curbs Canada’s growth

Opinion

Last month’s second-quarter GDP numbers showed that the Canadian economy continues to muddle along, with both real GDP and employment edging up just one percentage point in the past year. The Trump-induced decline in exports got the headlines but what’s hampering our economy has more to do with lagging business investment.

Exports have already begun to recover. Most remain duty-free — for now — because they comply with the terms of the CUSMA trade deal.

What’s much more menacing is the renewed weakness in Canada’s business investment, even as such investment surges State-side. Business spending on machinery and equipment was down fully 9.4 per cent in the second quarter. Slow growth — or even a reduction — in our capital stock imperils our long-term growth.

In real terms, business investment fell 2.3 per cent in the second quarter, with spending on structures and equipment dipping below $200 billion for the first time since 2021. This continues a decade-long slide, with a drop of 11.7 per cent since the last peak, in 2014.

Slumping business investment in this county is in stark contrast with booming investment in the United States, where the cumulative increase in real investment since 2014 is an astonishing 47.2 per cent.

U.S. investment has been concentrated in machinery and equipment and intellectual property, reflecting large outlays by the technology giants that make up the so-called “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla).

These seven companies alone account for over half the gain in the stock market since 2020, reflecting their dominance in emerging technologies such as cloud computing and artificial intelligence.

There are no equivalents in Canada. We don’t even have a Magnificent One.

Since 2014, real annual investment per worker in Canada has plunged 17.0 per cent. Not surprisingly, per capita GDP growth has slowed to a crawl, inching up only 0.2 per cent a year over that period. The stark difference between investment in the U.S. and Canada is reflected in a growing productivity gap. Labour productivity here has barely changed over the past decade. In the U.S. it’s up 20 per cent.

Instead of providing short-term stimulus and spending more on social programs, such as child care, dental care and pharmacare, Canada’s federal government needs to shift its focus to reviving business investment. Higher investment is the only way to boost our productivity and raise our growth rate.

It is very encouraging that Prime Minister Mark Carney prioritized economic growth in his election platform, setting a goal to “build the fastest-growing economy in the G7” and “make Canada the world’s leading energy superpower.” On the other hand, it is not clear Carney knows how to address our structurally weak business investment and productivity.

Supporters point to his impressive credentials as a two-country central banker but in practice this means he has specialized in stabilizing economies hit by short-term shocks such as banking crises or currency stress. Rescuing an economy in this way does not provide experience or expertise in reviving long-term private-sector confidence and therefore investment.

Carney’s announcement last week of billions more in aid for firms and workers affected by tariffs shows a continued preoccupation with stabilization, not structural reforms.

In fact, there’s good reason to doubt Carney is capable of cultivating a business culture that encourages and rewards investment, productivity, innovation and entrepreneurship.

In 2012, when governor of the Bank of Canada, he criticized firms for not spending enough, and instead sitting on stockpiles of what he called “dead money.” This attack misrepresented how much firms were actually investing — they were on track to reach a record high in 2014 — and gave scant credit to them for protecting their balance sheets, a perfectly reasonable response to an era that Carney’s successor as governor, Steve Poloz, termed “The Next Age of Uncertainty” in the title of his 2022 book.

Canada has a highly educated labour force. But we handicap our workers by not providing them with the tools and technology to work more productively. Unless we start to close the gap with surging U.S. investment, our productivity and incomes will fall even further behind. That will drive our most productive and innovative young people and entrepreneurs to the U.S., no matter who occupies the White House.

» Philip Cross is a senior fellow at the Macdonald-Laurier Institute. His column first appeared in the Financial Post.