BUSINESS
10/30/2019 15:57 EDT | Updated 10/30/2019 16:00 EDT

Canadian Business Investment Drops To 25-Year Low, Sparking Questions About Job Growth

Who wants to invest in an old-fashioned economy?

benedek via Getty Images
An aerial view of Toronto's central business district.

MONTREAL ― If you want an idea where the job market is headed next, take a look at business investment. 

The money businesses put towards growing their operations is a key piece of the economic puzzle. After all, businesses can’t hire if they don’t invest.

So it’s a bit alarming to hear that business investment, as a share of Canada’s economy, has dropped to its lowest levels since the mid-1990s, when the country was pulling out of a particularly prolonged recession, and businesses weren’t in the greatest shape for investing.

Watch: The most in-demand jobs in Canada. Story continues below.

 

 

“That is simply not normal at this advanced stage of the business cycle,” said Bank of Montreal chief economist Doug Porter. After a decade of solid economic growth following the financial crisis, Canadian business investment should be riding high ― as it is, right now, in the U.S.

Business investment took a dive in Canada when oil prices fell in 2014, and not much has come around to replace that oil money, Porter wrote in a client note Wednesday that he concluded with the words, “Ottawa, we have a problem.”

He published this chart showing non-residential business investment holding near record highs in the U.S., while falling precipitously in Canada.

BMO Economics
This chart shows business investment as a share of Canada's economy, going back to the 1960s. Current levels in Canada are their lowest since the recession of the early 1990s, while in the U.S. they are near the high end of the range.

But while that would normally mean a worse job market ahead, Porter isn’t sure that will happen this time around. In fact, Canada’s stellar job growth over the past few years might actually be related to the fact that businesses haven’t been investing.

“Some people have suggested that we’re ... seeing businesses, in this time of great uncertainty, hiring people instead of buying machines,” Porter said.

If they keep doing that, Canadian hiring might hold up even despite the low levels of investment cash floating around, Porter suggested.

So why is business investment weak in Canada and strong in the U.S.?

One major factor, Porter says, is the world-leading high-tech sector in the U.S. Businesses spend far more money investing in intellectual property in the U.S. than they do in Canada ― and these days intellectual property is a major part of any advanced economy.

In fact, Canada’s economy is looking a little old-fashioned, dependent as it is on construction and resource extraction.

“When you look at (investment in) machinery and structures, there’s not a big gap between Canada and the U.S. Where there is a huge divergence is on intellectual property,” Porter told HuffPost Canada in an interview.

U.S. investment benefits Canada

That U.S. investment can still benefit Canada in the form of jobs. For instance, Toronto was recently named the top city for tech job creation in North America, partly due to more American companies hiring in Canada to avoid toughened rules for foreign workers under the administration of U.S. President Donald Trump.

Porter noted that policies in the U.S. and Canada are diverging. While Canada may be more accommodating to the sorts of workers tech companies need, in the U.S. those companies got a large tax break at the end of 2017 thanks to a Republican-led Congress.

“Whatever you think of the (Trump) administration, I think it has been very friendly to business, whereas I’m not sure you can say that in Canada,” Porter said.

“If the background was a bit friendlier, then perhaps businesses would be willing to invest more, which would lead to better productivity and better wage gains down the line.”