Steep drop in business investment bad news for Canadians
In recent years, economists have warned of Canada’s weak business investment, particularly compared to the United States. Business investment provides workers with the tools and new technologies to produce more and better goods and services. And as firms become more efficient, improve productivity and increase profits, they’re able to pay higher wages, which means business investment is a key factor for higher incomes and living standards. So weak business investment is bad news for Canadians and should raise alarm bells for policymakers.
A new study published by the Fraser Institute assessed per-worker business investment, which includes spending on equipment, machinery, factories and new technologies (but excludes residential homebuilding) and found that from 2014 to 2021 (the latest year of available data), business investment per worker in Canada (adjusted for inflation) declined by 20.0 per cent, from $18,363 to $14,687.
Compared to the United States, our performance was even worse. During that same time period (2014 to 2021) in the U.S., business investment per worker (adjusted for inflation, in Canadian dollars) increased by 14.6 per cent, from $23,333 to $26,751.
Put differently, businesses in Canada went from investing approximately 79 cents per worker (for every dollar invested in the U.S.) in 2014 to only 55 cents in 2021.
Why the steep decline?
The energy sector comprises a larger share of the Canadian economy than in the U.S., and after the oil-price collapse in 2014, oil and gas investment did not fully recover in Canada as it did for our southern neighbour. In large part, this is due to an increase in regulatory constraints, policy uncertainty and an unfavourable business environment for energy development in Canada.
However, declines in the energy sector do not solely explain Canada’s faltering business investment. As many analysts have indicated, the federal government’s recent tax and regulatory policies have helped spur an overall flight of investment capital from Canada. For instance, according to one analysis, roughly two-thirds of Canada’s 15 main industries experienced declines in business investment from 2014 to 2017 including wholesale trade, accommodation and food services, utilities, professional services, and manufacturing, while nearly half (seven of 15) saw a decline in investment from 2014 to 2019. It's also worth nothing that these declines predated the pandemic, which only exacerbated an existing problem.
Finally, weak business investment should be of urgent concern because Canada’s recent overall economic performance has been relatively poor in historical terms, particularly when measured on a per-worker basis. According to OECD forecasts, Canada will record the worst economic growth among advanced countries from 2030 to 2060. In light of this gloomy economic outlook, and because Canadian prosperity depends in large part on the strength of business investment, policymakers should enact policy reforms to make Canada a more attractive place to invest and do business.
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