Thanks for having me back.
I promise I'll limit my reference to data to the first two paragraphs, so don't be scared that I'm going to drone on with data from my StatsCan days forever.
Canada's real GDP fell by 0.1% in February, continuing a weak trend of only 0.1% growth over the last six months. Mediocre growth of less than 2% has persisted from 2015 to 2019, with the exception of a 3% gain in 2017.
Canada's slow economic growth is all the more striking in view of accelerating growth in the U.S., our main trading partner. Over the past four quarters, real GDP in the U.S. has risen by 3.3%, building on gains of 2.9% in 2018, 2.2% in 2017 and 1.6% in 2016.
The United States is the only G7 economy that has strengthened consistently over the last four years. What explains the unique buoyancy of the U.S. economy? One variable stands out as different in the U.S.: the steady acceleration of business investment. As documented in the Bank of Canada's recent monetary policy report, business investment growth in the U.S. has strengthened steadily from essentially nothing at the end of the Obama administration to nearly 7% over the past year.
Why is business investment robust solely in the U.S.? The upturn reflects the raft of pro-business initiatives from the administration, including historic cuts to corporate income taxes, accelerated writeoffs of capital spending, massive deregulation, and the most pro-business rhetoric seen from any administration in recent memory.
By contrast, business investment in Canada today is 13% below its peak in 2014, and the Bank of Canada anticipates another small decline in 2019. Of course, some of the weakness in business investment reflects the 2015 downturn in oil prices. However, investment since then has declined in a majority of industries despite the absence of a recession. As such, much of the retreat is due to factors within Canada's control. For example, pipeline firms want to invest more, but have been continually thwarted by government opposition and regulatory blockades. This fosters the growing impression in the global business community that Canada is not serious about committing to economic growth, focusing instead on the distribution and not the creation of income.
Some may claim that sustained employment growth reflects a buoyant economy. The regional breakdown of jobs growth suggests that new provincial government policies and attitudes to business have sparked these gains more than the macroeconomy. The upturn of employment, even as GDP has sagged, has been concentrated in Ontario and Quebec. As detailed in a recent commentary I wrote for MLI, firms in Ontario delayed hiring in the first half of 2018 until they were certain that the Wynne government would not be re-elected. That government had adopted several policies that made labour more expensive for firms. However, once a new government was elected in June, firms became more confident that their labour costs would not be subject to further unexpected increases and they resumed hiring. Hiring the former head of the Ontario Chamber of Commerce as chief of staff for the Treasury Board minister sends a resounding message to the business community.
A similar pattern played out in Quebec around the election of the CAQ government under François Legault. In the year before its election, jobs in Quebec fell outright by 0.6%. However, the election of the CAQ with a platform of tax cuts, no referendum on sovereignty and a firmly pro-business cabinet was followed by a surge in jobs, despite widespread reports in Quebec of labour shortages.
With employment surpassing output growth at the turn of the year, the effect is a further dampening of labour productivity. Stagnant labour productivity has become chronic in Canada with no net change since the oil price crash late in 2014. Lagging productivity is symptomatic of our declining competitiveness regularly cited by Canada's business leaders. Weak productivity reflects the failure over the last two years to engineer a transition to growth driven by business investment and exports.
In a little-noted speech in February, Bank of Canada Governor Stephen Poloz addressed the power and limitations of policy. He acknowledged the risks of maintaining low interest rates far longer than ever envisioned in 2008, including the stress for retirees who rely on interest income and the risk of rising household debt levels. Most importantly, Poloz acknowledged that economists do not have a complete understanding of how the economy works and how it will react in the future to policies adopted in today's uncertain global environment. It is time for more federal leaders to similarly recognize the limits of the government's ability to manipulate outcomes in our economy. Fostering a better environment where businesses can invest and grow may be one of the best initiatives it can make.
The trend of jobs in Ontario and Quebec underscores the importance already demonstrated in the U.S. of adopting pro-business policies and attitudes. Seeing new governments in Ontario and Alberta competing for the mantle of “open for business” shows that Canada is beginning to understand the necessity of responding to the pro-business administration in Washington. Former President Obama said, “The world needs more Canada.” If he'd understood Canada more, he would have added, “Canada needs more business.”
Thank you.