Carolyn Rogers, The Bank of Canada’s senior assistant governor lately raised the fear of Canada’s productivity calamity, saying it is time to break the glass. However, to attend to Canada’s productivity problem, which is exerting pressure on our lethargic living standards, we must initially address Canada’s frail business investment.
Canada’s economic growth in the final quarter of 2023, as assessed by per-person GDP, a general indicator of living standards, was $58,111, which is a little less than it was after 2014 at $58,162 (after inflation adjustment). This indicates that over the last decade, Canadian living standards have not improved. Certainly, our economic difficulties span well past the pandemic. In the five years before 2019 (the previous pre-COVID year), Canada’s per-person GDP was the 4th weakest out of 38 advanced countries.
Regrettably, forecasts for the future are hazy. According to the OECD, Canada will state the lowest rate of per-person GDP progress among 32 advanced economies over the next 40 years. Countries such as Estonia, South Korea, and New Zealand are anticipated to overtake Canada and accomplish higher living standards by 2060. Given that productivity growth—basically, the value of economic output per hour of work—is crucial to higher living standards, it’s no wonder that Rogers and other predictors are raising alarms. But what is at the heart of our efficiency crisis?
Putting it in a simple format, “weak business investment”. While the federal and numerous provincial governments have prioritized immigration and bigger government to kindle productivity growth and cultivate our economy, they’ve overlooked business investment, which has significantly weakened in recent years.
From 2014 to 2022, total business investment (in plants, technology, equipment, and new machinery but exclusive of residential construction) in Canada deteriorated by C$34 billion. In the same period, after adjusting for inflation, business investment per worker weakened by 2.3 percent yearly.
In comparison to business investment per worker raised by
2.8 percent yearly from 2000 to 2014. While business investment has mostly deteriorated in Canada since 2014, in other countries, including the United States, it has continued to grow. As a result, Canada’s GDP per hour worked—a crucial indicator of productivity progress—is among the lowest in the OECD.
Looking from another angle, when businesses invest in physical and rational capital they train workers with the tackles and skills (e.g. machinery, computer programs, artificial intelligence) to yield more and deliver higher quality goods and services, which power innovation and develop productivity.
The good news is that governments across Canada can pass policies to help arouse business investment, productivity improvements, and eventually, sturdier economic growth. The significance is to decrease arduous regulations, harness high government expenditure, and generate a pro-growth tax atmosphere that makes Canada a more striking place for businesses to discover and invest. These strategies have an established track record of improving business investment in Canada. Lacking a change in the investment environment and sturdier productivity growth, the economic viewpoint looks grim. Fortunately, Canadian governments can answer this problem with pro-growth policy reform.
