The 90 per cent of the Canadian economy outside of the energy sector barely grew at all over the past year.Mark Blinch/Reuters
The narrative for the past year and change has been the Canadian economy's heavy reliance on oil as well as the lack of pipeline expansion capacity (which just added insult to injury).
As usual, it is the story beneath the story that is most important.
The grim reality is that everyone believed that having the Canadian dollar depreciate from around par to 80 cents (U.S.) would do the trick in terms of revitalizing the manufacturing sector as an antidote to the detonation in the energy patch, but in fact it took a 70-cent loonie to accomplish that feat.
In other words, we found out in all this that we were far less competitive than we had believed and, as such, had to accept a national pay cut to recapture lost share in the U.S. spending market, which is what currency devaluations amount to.
The 90 per cent of the Canadian economy outside of the energy sector barely grew at all over the past year, and auto production contracted 3 per cent even while U.S. auto sales hit decade highs – these are the stories beneath the headlines that truly matter.
In fact, our competitive challenges are nothing new and neither is the secular decline in Canada's potential non-inflationary economic growth speed limit.
It has gone from around a 4-per-cent annual rate in the 1970s and 1980s to 3 per cent in the 1990s to 2 per cent in the lead-up to the financial crisis to little better than 1 per cent now.
Bolstering the supply side of the economy – labour, capital and multifactor productivity (how the two inputs to the production process commingle with each other to make the sum of the parts greater than the whole) – should be a critical goal of the new Liberal government.
After all, each percentage-point increase in potential growth adds $20-billion (Canadian) to national income and nearly 200,000 new jobs.
It is evident in the data that we have some major challenges on all three items cited above.
On the labour side, there are several issues.
Firstly, we are getting older – the median age of population is nearly 41; it was 26 in 1970.
We have growth in the working-age population down to a record low of 0.4 per cent – this was 1.4 per cent when Michael Wilson was the minister of finance in the 1980s and 1 per cent when Paul Martin was handed the baton in the 1990s. Bill Morneau now faces practically no growth in the work force.
The second key here is immigration – we are taking in a lot of people (around 250,000 a year), but actually less than we were a decade ago, and unlike 10 or 20 or 30 years ago, it is taking a much longer time to close the immigrant wage gap with the national average.
The truth is always in the price. In this case, the price of labour for new entrants to the country is lagging and this seems to come down to a host of issues such as literacy, integration, training and education – so not just quantity but quality.
And for some reason, we are now up to around 60,000 Canadians emigrating annually, offsetting about 20 per cent of the immigrant inflow. We continue to suffer a brain drain that impedes productivity growth.
Who are these people? Why are they leaving? Are they all snowbirds (even with this level of the currency)?
That brings me to the third issue: education. Near the top in terms of numbers of the graduates that we are churning out are arts, humanities and MBA grads.
I take nothing away from them and of course society needs social scientists and business graduates, but we are talking about the skills that companies need, and the number of graduates in disciplines such as math, statistics and computer science are at or near the low end – at a time when employment in Canada in areas such as finance, real estate, construction and retail is at a record high.
Yet here we have employment in the technology sector down 3 per cent in the past year and 10 per cent in the past five years. While we do have that tiny tech corridor between Kitchener and Waterloo, where exactly is our Silicon Valley equivalent? High value-added tech production has been on a steady downtrend now for 15 years.
With this in mind, it is little wonder that a recent Canadian Federation of Independent Business survey showed that 30 per cent of small firms cited skilled labour shortages as their top impediment to growth.
The real dichotomy here is that the academic areas that we are churning out the most university graduates are in the areas with the lowest placement rates, and the areas we generate the least amount of graduates are in the highest demand.
This may be more of a provincial jurisdiction than federal, but there is a clear skills mismatch and one that small businesses in particular have identified as a hurdle to activity.
So that's labour, but what about capital?
There's been practically no growth in the private sector capital stock in nearly a decade.
One-in-four small businesses told the Canadian Federation of Independent Business that accessibility and cost for technology inputs is their top challenge – a 70-cent dollar makes it most prohibitive. The reality is that as we focused so much on energy, the lack of a vibrant and larger tech sector in Canada has meant that three-quarters of our capital goods needs are now met by imports.
The question for our policy makers is this: Why isn't there an indigenous technology sector in Canada to meet the capital input requirements that the business sector identifies as being expensive and difficult to source?
One final point: For all the impediments to economic activity, the one cited most by small businesses was "taxes and regulation" – about 60 per cent of them cited this as their top hurdle; nothing else comes close to being cited as a hurdle for the Canadian economy. Clearly government policy is at play here too.
So, it is not just labour, but what appears to be a chronic lack of productivity from capital too.
The bottom line is that raising top marginal tax rates is not the answer. The answer is tax reform that mobilizes the resources from consumption to investment – which means raising the GST back to the original 7 per cent (from 5 per cent now) and provide tax relief for the corporate sector and incentives for startups and entrepreneurs (as in preferential tax treatment of stock options).
If those GST proceeds were to then be deployed in income tax relief, it would allow for a reduction in the federal corporate income tax rate to around 11 per cent based on our back-of-the-envelope calculations (yes, retailers won't like it too much but we import much of what we buy anyway so the job loss here would be limited and actually swamped by the improved profit backdrop for the business sector given the time-worn tight link between corporate profit and employment generation).
In other words, the answer to these challenges from a public policy standpoint is to create an environment where risk-taking will be rewarded.
David Rosenberg is chief economist and strategist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave. For a two-week trial to the newsletter, click here and use promo code "Globe"
David Rosenberg