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opinion

Manulife Asset Management.

Canada needs business investment, and it needs it now. The optimistic narrative for Canada’s economy in 2018 and 2019 has been that a meaningful export revival and a surge in company spending could compensate for slower consumer spending.

That story has been half-right: cracks in household economic strength are now starting to show. Credit growth and spending activity are both decelerating. That’s the predictable consequence of higher interest rates. Yet the hoped-for drivers of growth are missing. Export growth has been tepid at best, particularly for non-energy exports. Even the Bank of Canada expects exports to contribute exactly zero per cent to growth in 2018.

More disappointing still is that most data suggest business investment is lukewarm. In any economic environment, that would be a knock against growth, but it’s even more concerning in the current environment. Companies are urgently running out of spare capacity, particularly in manufacturing; more and more of them say they would not be able to meet an unanticipated increase in demand. Canada needs its businesses to scale up operations now, or the economy will come up against a speed limit that it can’t surpass.

Just about everyone agrees that business spending would be higher if we weren’t contending with two Trump administration effects – heightened uncertainty about trade and lost tax competitiveness with the United States. However, there’s far less consensus about how to respond to this. Some say we need a weaker Canadian dollar and equivalent tax cuts to the U.S. In my view, these aren’t the right solutions. A weaker loonie can help boost exports and economic activity at the margin, but it carries costs along with benefits.

Canada has particularly high import propensities – meaning that as the Canadian dollar weakens, anything we import becomes more expensive. Remember the Cauliflower Crisis of early 2016, when vegetable prices jumped 18 per cent from the previous year? It could well happen again. What bad luck that the Canadian industries where investment is most needed, like manufacturing, also tend to have the highest import propensities.

A weaker Canadian dollar would therefore not only push costs up for these companies, it would also deter investment – the exact opposite of the goal. It’s also an unrealistic remedy. With oil prices floating around multiyear highs and a central bank that appears keen to continue hiking interest rates, a substantial depreciation of the Canadian dollar isn’t likely.

What about tax cuts? Broad cuts aren’t the answer either, at least not right now. For one thing, some of the new U.S. tax policies are not permanent and will expire between 2023 and 2027. Plus a sharply deteriorating U.S. fiscal position could also reasonably result in policy reversal in the future. The complexities of the U.S. corporate tax system (exemptions and depreciation allowances are examples) mean that it will likely be years before we can gauge the exact impact of the policy changes.

Deficit-financed tax cuts to cure a volatile and moving target are an expensive and risky approach. It’s also an approach that would attract unfavorable attention from global markets and rating agencies who are already closely monitoring Canada’s weakening fiscal position. But Canada does have a variety of cheaper and more effective methods to stimulate more business activity.

Make it easier to hire

Yes, streamlining occupational licensing is important, but let’s also address cost-of-living issues such as affordable housing and child-care costs so that companies can offer competitive wages to both domestic and foreign talent. Canada must be more than just a lovely and welcoming place to live; it also has to be accessible and affordable. When global companies announce new jobs in Vancouver or Toronto, our first reaction shouldn’t be, “But where will the employees live?”

Make it easier to build

A major reason the Canadian dollar and Canadian energy stocks haven’t bounced back in tandem with oil prices is a growing perception that Canada can’t get its commodities to market. Canada’s energy market attracts one out of every five dollars of business investment – that figure used to be one out of every three. Red tape in infrastructure extends beyond pipelines. Canada continues to rank well in terms of tax competitiveness in the OECD but is consistently found near the bottom of the list for government bureaucracy and has been losing ground on infrastructure rankings.

Canada’s economic story isn’t all bad. Jobs are aplenty, the global economy is solid, and growth, while lower than in 2017, is still a long way from a recession. But if Canada wants to do more than muddle through for the next year, it has to recognize that business investment isn’t just about long-term competitiveness. It’s also about jump-starting growth right now.

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