In a prebudget consultation last winter, Bank of Nova Scotia chief economist Jean-François Perrault warned Finance Minister Chrystia Freeland that she was in danger of oversubsidizing labour at the expense of capital. Nine months further along an economic recovery that has become complicated by labour shortages, he’s stressing that point to her again.
“It’s certainly my view that [government policies] have favoured supporting the labour side versus the capital side in the pandemic. There’s no question,” he said in an interview this week.
“There needs to be something to turbo-charge Canadian investment.”
Mr. Perrault delivered that message to Ms. Freeland personally last week, as the Finance Minister met virtually with a panel of senior private-sector economists – the traditional consultation in advance of the government’s fall economic and fiscal update, promised for sometime in the next three weeks. This week’s third-quarter gross domestic product report from Statistics Canada underlines the point that the recovery is top-heavy on the consumer side, while business investment brings up the rear.
While real GDP (that is, excluding inflation) expanded at a brisk 5.4-per-cent annualized pace in the quarter, the main driver of that growth was household consumption, which surged nearly 18 per cent annualized. Business gross fixed capital formation, on the other hand, contracted nearly 18 per cent, its second consecutive quarterly decline. Since the start of the pandemic, household spending is up 2 per cent, in real terms; business investment in non-residential structures, machinery and equipment is down 11 per cent.
It’s not as if the private sector lacks the money. Canadian Imperial Bank of Commerce economist Benjamin Tal estimates that during the pandemic, the collective stockpile of corporate cash is about $175-billion higher than its prepandemic trend.
There are some encouraging indications – most notably, from the Bank of Canada’s fall Business Outlook Survey – that the private sector may be prepared to loosen its purse strings considerably. That quarterly report showed that capital spending intentions over the next 12 months are the highest in the 23-year history of the survey.
But the reality is that the government’s economic policies in the pandemic have done remarkably little to stimulate business investment, while delivering a great deal indeed to protect the labour market and support household incomes.
As the economy has recovered, that significantly tilted the scales in favour of hiring rather than capital spending. That may have contributed to the labour crunch many businesses and sectors are now experiencing.
“If we had somehow found a way to steer more dollars to encourage capital spending, as opposed to maintaining the labour force as it was, perhaps we wouldn’t have a million job vacancies now,” Mr. Perrault argued. “Perhaps firms would have taken the last 18 months to try and rethink, retool, invest, in a way that would make the expansion less labour-intensive.”
This certainly isn’t an issue unique to Canada. In a global economic outlook published Wednesday, the Organization for Economic Co-operation and Development worried that governments’ fiscal focus is still too much on emergency measures to lean against the impact of the pandemic, and not nearly enough on the building blocks for a strong recovery.
“We are more concerned by the use made of debt than its level,” OECD chief economist Laurence Boone wrote in the report. “It is time to refocus fiscal support on productive investment that will boost growth, including investment in education and physical infrastructure.”
For Canada, though, the solution must go beyond a refocusing of public spending over the next few years. It needs to include incentives to light a fire under business investment that was, frankly, a problem long before the pandemic came along. Crisis policies may have merely encouraged a long-standing tendency in our private sector to favour investments in labour over capital.
In the five years prior to the pandemic, total employment in this country rose 8 per cent. Over the same period, non-residential business investment, excluding inflation, fell 15 per cent.
Mr. Perrault suggested that the optimistic investment outlook in the Bank of Canada’s business survey masks the bigger picture: that Canada remains an underperformer relative to our global peers, even in this recovery.
“Canadian investment is probably going to rise less than a lot of our competitors this year; investment is rising everywhere,” he said. “The temptation is going to be to say things are improving … [but] if our relative investment continues to decline, then our competitiveness hurts, our productivity hurts.”
In a report this week, National Bank of Canada chief economist Stéfane Marion noted the country’s private non-residential capital stock – basically, all the physical structures, machinery and equipment owned by the private sector – actually declined last year, for the first time on record. While the pandemic was undoubtedly a contributing factor, growth has been generally trending downward for more than a decade.
“Whatever the cause of this lack of private investment, we must turn it around,” Mr. Marion said.
“Canada, as a small, open economy … must do a better job of growing its capital stock to take advantage of a highly successful immigration policy, and harness the productive power of a growing work force of highly skilled people.”
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