Stronger non-residential investment is key to a brighter future for Canada

08/30/2012 by John Clinkard

Over the past several years, analysts and policy makers in Canada have bemoaned the fact that our weak pattern of investment would stunt economic growth and thereby depress our standard of living relative to the other major developed countries.

However, based on recent research published by the C.D. Howe Institute, after years of sub-par performance, there is clear evidence that business investment in plant and equipment per worker in Canada is starting to grow faster than in most other major developed countries in the Organization of Economic Co-operation and Development (OECD).

The study notes that through the early part of the past decade, business investment as measured by gross non-residential private capital spending per worker, was consistently below the average of the OECD and well under investment spending in the US.

For example, during the period 2001 to 2005, firms in Canada spent on average $600 less per worker on business investment in plant and equipment than the average of the OECD countries and $2180 less than in the United States.

Since 2006, partly due to the fact that the recent recession hit the majority of OECD countries harder than it did in Canada, investment per worker has increased significantly, averaging $11,000 per worker between 2006 and 2010 compared to $9,140 during the previous five year period.

At the same time, the gap between Canada’s investment per worker and the OECD average narrowed to a mere $180 and to $1,340 vis-à-vis the U.S.

The study also notes that the uptrend in investment per worker continued through 2011 and based on preliminary data, firms in Canada invested on average more per worker than the OECD average although the spread between spending in Canada and the US increased slightly during the year.

Although the recent uptrend in investment spending bodes well for economic growth and living standards for the country as a whole, there is a considerable divergence among the major regions.

Specifically, resource rich provinces including Alberta, Saskatchewan and Newfoundland and Labrador have seen significant investment growth over the past ten years taking their average investment per worker to more than twice the OECD average.

However, in the rest of the country, the investment picture is much less positive with plant and equipment spending per worker in 2010 ranging from a low of $4,900 in Prince Edward Island to a high of $9,600 in Manitoba.

Moreover in Ontario, home to almost 40% of the country’s population, investment per worker has steadily declined relative to the national average from 86% in 2011 to 67% in 2010.

There is no doubt that higher resource prices have been instrumental in attracting capital investment to Alberta, Saskatchewan and Newfoundland.

However, across the remainder of the country there are significant impediments to business investment in the form of high taxes, restrictions on foreign investment (especially in telecommunications, transportation and financial services) and policies which favour residential construction and crowd out business non-residential investment.

Efforts to reduce these barriers to investment would help to ensure that living standards rise in a more balanced fashion across the country.

Investment per worker – Canada, the United States and the OECD

Investment per worker – Canada, the United States and the OECD
Data Source: OECD and C.D. Howe Institute/Chart: Reed Construction Data, CanaData.