Canada's economy is in dire need of business investment to boost productivity and cope with labor shortages as the nation faces a mild recession this year. According to Nathan Janzen and Abbey Xu from RBC Economics, business investment is just starting to recover from a 19% drop during the pandemic, and it's essential for ensuring the country's long-term competitiveness.
Demographc challenges
Demographic challenges, such as the baby boomers reaching retirement age, have led to a persistent labor shortage in Canada. This situation makes it crucial for businesses to invest in more efficient operations. Central banks, like the U.S. Federal Reserve, are rethinking interest rate policies in response to recent financial market stress, trying to balance inflation control and avoiding excessive economic downturns.
Janzen and Xu emphasize that periods of weak investment can harm Canada's long-term competitiveness. Following the 2008/09 recession, Canadian business investment experienced a slow recovery, resulting in stagnating worker productivity growth. Canada's productivity performance since the pandemic has also been underwhelming, lagging behind a 4% increase in the U.S. A further decline in investment spending could exacerbate the productivity issue as the aging population exacerbates labor shortages.
Business investment set to rise in 2023
Despite concerns about a recession, Canadian businesses are planning to increase investment by 4.3% this year, as indicated by Statistics Canada's annual capital expenditure intentions survey. RBC Economics predicts a 1.5% rise in business investment in 2023 (excluding price impacts). This investment growth would be unprecedented, as it would outpace GDP growth during a recession, unlike previous Canadian recessions since 1981.
The mild nature of the expected economic downturn and a recognition of the ongoing labor shortage issue contribute to the relatively optimistic outlook for business investment. Moreover, businesses have access to funds for investment due to strong corporate profits, which were nearly 30% higher than pre-pandemic levels as of Q4 2022. Cash savings held by non-financial corporations accounted for almost a third of annual Canadian GDP in late 2022, a significant increase compared to pre-pandemic levels.
Federal budget incentives
The 2023 federal budget introduced tax credit programs to reduce the cost of investments in the low carbon economy, further incentivizing business investment. With a tight labor market expected to persist, wage pressures will increase, making productivity-enhancing investments relatively cheaper even with higher interest rates. Though recent financial market turmoil has elevated credit spreads, they remain manageable, and central banks are prepared to handle any intensification of credit market stress.
Sustained investment coupled with productivity gains are critical
Janzen and Xu note that business investment isn't the sole solution for improving efficiency; better utilization of immigrant skills could also significantly boost productivity. However, Canada's economy cannot afford another decade of weak productivity growth, making it imperative for businesses to continue investing in their operations.
In conclusion, Canada's economy requires sustained business investment to address labor shortages, enhance productivity, and maintain competitiveness in the face of an impending mild recession. With strong corporate profits and government incentives, businesses have the resources necessary to invest in their operations and drive the country's economic growth.
Footnote:
1 Adapted from source: "Proof Point: Canada’s economy can’t afford a slump in business investment - RBC Thought Leadership." RBC Thought Leadership, 5 Apr. 2023, thoughtleadership.rbc.com/proof-point-canadas-economy-cant-afford-a-slump-in-business-investment.
2 Photo by Lucas George Wendt on Unsplash
