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The Investment Conundrum

By Jock Finlayson

The Canadian economy is rebounding from the slow-growth phase triggered by the oil price collapse that began part-way through 2014.  At the same time, the BC economy continues to perform quite well, with the province leading the country in the growth of GDP, employment and retail sales over 2015-16.

But there is an important caveat to this mainly good news macroeconomic story: persistently sluggish business investment outside of the residential housing sector.  Adjusted for inflation, business non-residential capital spending has been on a declining trend for several years.  The slump is particularly evident in the energy sector, but the weakness has spread well beyond the oil and gas industry.

The charts below help to illustrate what’s been happening – and the extent to which BC has been falling short in business capital spending.

Figure 1 depicts capital spending on non-residential building for Canada and BC, measured as a share of GDP.  The data confirm that BC has broadly matched the country on this investment indicator.  In BC’s case, the series can be somewhat volatile due to the start-up and winding down of a handful of large-scale non-residential building projects (such as new office towers and major retail complexes). 

 

Figure 1:  Capital Expenditures on Non-Residential Building Construction, % of GDP

 Source:  CANSIM Table 029-0050.  Excludes engineering construction.

 

Figure 2 focuses on trends in investment in what Statistics Canada calls “engineering construction”.  This consists of infrastructure-related investments in the marine, transportation, waterworks, communications, electricity, oil and gas, and mining sectors.  Both Canada and BC have seen a sharp downturn in this kind of investment in recent years, with BC falling further behind the Canadian benchmark when capital spending is measured relative to economic output (GDP). 

 

Figure 2:  Capital Expenditures on Engineering Construction, % of GDP

Source:  CANSIM Table 029-0050. 

 

Figure 3 presents the most alarming picture from a BC perspective.  It shows capital spending on machinery, equipment and technology as a share of GDP.  The overall trend-line has been negative for Canada and for BC since the 2008-09 economic downturn.  But BC’s performance has been nothing short of dismal, with M&E investment dipping to less than 3.5% of GDP versus 4.2% for Canada as a whole since 2012.

 

Figure 3:  Capital Expenditures on M&E, % of GDP

 

Source:  CANSIM Table 029-0050.

 

Finally, we look at how Canada and BC compare to some other advanced economy jurisdictions in business investment.  Drawing on a recent C.D. Howe Institute publication,[1] Figure 4 shows the amount of investment per worker in both Canada and BC, relative to such investment in the United States and the 30 or so industrialized countries that belong to the Organization for Economic Cooperation and Development (OECD).  In 2015, firms operating in BC devoted only 56% as much as firms in the United States – and two-thirds as much as businesses in the OECD collectively -- to investments in construction, machinery and equipment, technology, and intellectual property products, measured on a per employee basis.  Canada fared a little better than BC, but still visibly lags both the United States and many other advanced economies.

 

Figure 4:  Tangible Investment Per Worker as a Share of US and OECD Average, 2015, %

Source:  C.D. Howe Institute, 2017.

 

A pattern of sub-par investment in the economy’s productive capital stock augurs poorly for future living standards and will constrain our ability to raise real wages and incomes over time.   As the BC election campaign kicks into gear, all of the political parties should be turning their attention to the province’s disappointing performance on capital spending and thinking about policies that can help to boost private sector investment going forward.



[1] “Equipment Failure: Feeble Business Investment Costs Canadians their Competitive Edge,” C.D. Howe Institute, E-Brief, March 24, 2017.