Sensational headlines about economic growth breed complacency

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Appeared in the Financial Post, September 7, 2017
Sensational headlines about economic growth breed complacency

Given the sensational media headlines hyping Canada’s recent economic growth, it’s hard to blame Canadians for being complacent. “Canada's economy steamrolls ahead—4.5% annualized rate of expansion” declared the Globe and Mail. “Canada's economy blows away forecasts with 4.5% growth” proclaimed the National Post.

While these headlines may leave Canadians feeling positive and optimistic, they are unfortunately not an accurate depiction of the state of Canada’s economy and worse still, mask serious economic storm clouds on the horizon.

But let’s start with the positive—Canada had a relatively strong second quarter with the economy growing at 1.1 per cent over the past three months. That’s good growth, but let’s put it into perspective. Canada’s economy has grown at or above 1 per cent in 18 different quarters since 2000. This is really nothing new, or special.

How then did the Globe and Post (and most other media outlets) come up with their headlines of 4.5 per cent growth? They used Statistics Canada’s “annualized growth” number—the projected growth rate for the entire year that would result if the economy keeps growing at the same rate it did last quarter (again, 1.1 per cent).

While Canada has had quarterly growth at or above one per cent many times since 2000, we have not had consistent growth at this level over an entire year and therefore not had annual growth anywhere near 4.5 per cent. The bottom line—one quarter does not a year make.

In addition, we should have expected a positive bump in growth since Canada is coming off two of its most difficult years, with growth at a mere 0.9 and 1.5 per cent in 2015 and 2016, respectively. This was in part due to the contraction in the energy sector. With the energy sector now coming off its lows, economic growth should be higher. In fact, nearly 40 per cent of the increased economic activity in the second quarter can be directly related to the energy sector. And this would be significantly higher if spin-off impacts are properly accounted for.

Beyond this year, however, the economy is not expected to continue on its recent growth path. But don’t take our word for it. In February, the federal government released its 2017 budget and predicted average annual economic growth of 1.8 per cent over the next five years.

In July, the Bank of Canada had the following view: “Largely reflecting the surge in growth at the start of the year, real GDP is anticipated to expand by 2.8 per cent in 2017 before moderating to 2.0 per cent in 2018 and 1.6 per cent in 2019.”

This obviously is a very different picture then Canadians receive from the media and perhaps it’s why many are blissfully unaware that private businesses and international investors are losing confidence in Canada as a competitive place to do business.

According to data from Statistics Canada, investment by private businesses in plants, machinery and equipment has plummeted from $232.5 billion in 2014 to $197.3 billion in 2016, a decline of 15.2 per cent. Expectations are that investment will continue to decline this year and next. Even business investment in the much-promoted high-tech sector is down almost 13 per cent since peaking in 2012.

Unfortunately, the federal government and many provincial governments have greatly contributed to this by implementing policies that discouraged investment, entrepreneurship and economic growth.

Take for example, the significant increase in personal income taxes for skilled, educated workers and business owners that have occurred in Ontario, Alberta and at the federal level (also, British Columbia’s new government is expected to follow a similar path). In addition, Ottawa has created huge uncertainty, first with a proposal to increase capital gains tax (it refuses to even clarify whether these hikes are still in the works) and now with its plan to increase taxes on small businesses.

The federal government is also mandating carbon pricing (i.e. taxes and regulations) by all provinces in the face of other governments either cancelling plans or outright eliminating their existing programs (see Australia).

The federal and many provincial governments are also neck-deep in deficits with mounting debt, which implies the possibility of even higher taxes in the future.

Additional regulations for doing business have also been imposed by Ottawa and many provincial governments. These new regulations come at a time when Canada is already uncompetitive, ranking 22nd on the World Bank’s most recent index of the cost of doing business.

Simply put the federal and many provincial governments have made it more expensive to do business in Canada and reduced the rewards (i.e. increased tax rates) for success. Why would anyone, domestic or foreign, choose Canada as a destination for investment or entrepreneurship when markedly more hospitable environments exist?

Don’t be fooled by headlines. Canadians ought to be deeply concerned about the medium and long-term economic outlook for our country. This is especially true now when emerging policy reforms in the U.S. could further harm Canada’s economic interests.