Headlines about economic growth hide underlying problems

Private businesses and international investors are losing confidence in Canada as a competitive place to do business

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Headlines about economic growth hide underlying problems

815 words, with tag

By Niels Veldhuis
and Jason Clemens
The Fraser Institute

Given the sensational headlines hyping Canada’s recent economic growth, it’s hard to blame Canadians for being complacent. “Canada’s economy steamrolls ahead – 4.5 per cent annualized rate of expansion,” declared the Globe and Mail. “Canada’s economy blows away forecasts with 4.5 per cent growth,” proclaimed the National Post.

While these headlines may leave Canadians feeling optimistic, they’re not an accurate depiction of the state of Canada’s economy. And, worse, they mask serious economic storm clouds on the horizon.

But let’s start with the positive: Canada had a relatively strong second quarter: the economy grew at 1.1 per cent over the past three months. That’s good growth but Canada’s economy has grown at or above 1.0 per cent in 18 quarters since 2000. This is really nothing new or special.

How then did the Globe and Post (and many other media outlets) come up with their headlines of 4.5 per cent growth? They used Statistics Canada’s annualized growth number – the projected growth rate for the entire year that would result if the economy keeps growing at the same rate it did last quarter.

While Canada has had quarterly growth at or above 1.0 per cent many times since 2000, we’ve not had consistent growth at this level over an entire year and therefore not had annual growth anywhere near 4.5 per cent. The bottom line is that one quarter does not a year make.

In addition, we should have expected a positive bump in growth since Canada is coming off two of its most difficult years, with growth at a mere 0.9 per cent in 2015 and 1.5 in 2016. This was in part due to contraction in the energy sector. With the energy sector now coming off its lows, growth should be higher. In fact, nearly 40 per cent of the increased economic activity in the second quarter can be directly related to the energy sector. And this would be significantly higher if spinoff impacts are properly accounted for.

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Beyond this year, however, the economy is not expected to continue on its recent growth path. But don’t take our word for it.

In February, the federal government released its 2017 budget and predicted average annual economic growth of 1.8 per cent over the next five years.

In July, the Bank of Canada had the following view: “Largely reflecting the surge in growth at the start of the year, real GDP is anticipated to expand by 2.8 per cent in 2017 before moderating to 2.0 per cent in 2018 and 1.6 per cent in 2019.”

This is a very different picture than Canadians receive from the media and perhaps it’s why many are blissfully unaware that private businesses and international investors are losing confidence in Canada as a competitive place to do business.

According to data from Statistics Canada, investment by private businesses in plants, machinery and equipment has plummeted from $232.5 billion in 2014 to $197.3 billion in 2016, a decline of 15.2 per cent. Investment is expected to continue to decline this year and next. Even business investment in the much-promoted high-tech sector is down almost 13 per cent since peaking in 2012.

Unfortunately, the federal government and many provincial governments have greatly contributed to this by implementing policies that discouraged investment, entrepreneurship and economic growth.

Take, for example, the significant increase in personal income taxes for skilled, educated workers and business owners that have occurred in Ontario, Alberta and at the federal level (British Columbia’s new government is expected to follow a similar path). In addition, Ottawa has created huge uncertainty, first with a proposal to increase capital gains tax (it refuses to say whether these hikes are still in the works) and now with its plan to increase taxes on small businesses.

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The federal government is also mandating carbon pricing (taxes and regulations) by all provinces in the face of other governments either cancelling plans or outright eliminating their existing programs (see Australia).

The federal government and many provinces are also neck-deep in deficits with mounting debt, implying even higher taxes in the future.

Additional regulations for doing business have also been imposed by Ottawa and many provinces. These new regulations come at a time when Canada is already uncompetitive, ranking 22nd on the World Bank’s most recent index of the cost of doing business.

Simply put, the federal government and many provinces have made it more expensive to do business in Canada and reduced the rewards (through increased tax rates) for success.

Why would anyone, domestic or foreign, choose Canada as a destination for investment or entrepreneurship when markedly more hospitable environments exist?

Don’t be fooled by headlines. Canadians ought to be deeply concerned about the medium and long-term economic outlooks for our country. This is especially true since emerging policy reforms in the U.S. could further harm Canada’s economic interests.

Jason Clemens and Niels Veldhuis are economists with the Fraser Institute.

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