Time to invest in Canada

If Canada is to maintain its leading position, we need to be less reliant on credit-financed household spending and more geared to exports, investment and innovation, says Tiff Macklem.

Macklem is senior deputy governor of the Bank of Canada and in his recent W. Edmund Clark Distinguished Lecture, he provided a framework for “regearing” Canada’s economic growth.

“What to do?” asked Macklem, “First, learn from the mistakes of others to ensure we are prepared for the risks ahead. Second, confront our weaknesses with clarity and determination. And third, have the confidence to build on our strengths.”

So what are our weakness? Macklem refers to two “challenges”: climbing household debt and declining exports. In 2012, Canadian household debt increased to 164% of household income. In fact, he said, 66% of this rise in debt has been mortgage debt. Rising mortgage activity has fuelled housing activity. “The total number of housing units under construction is now well above its average relative to population. This is entirely accounted for by multiple-unit dwellings (which include condominium units).”

Macklem noted that those forces are moderating but, he also noted, it is too early to be sure.

Yet, it is consumers’ willingness to spend and go into debt that has fuelled Canada’s economic growth coming out of the Great Recession. “Eliminating the household sector’s net financial deficit would leave a noticeable gap in the economy,” Macklem said.

Exports could fill that gap but Canada’s share of world export market has slipped to 2.5% from 4.5% in the last decade with two thirds of that slippage the result of Canada’s choice of trading partners — slow-growth advanced economies. The other third is the result of Canada’s declining competitiveness.

“Between 1987 and 2010,” Macklem said, “Canadian investment per worker in machinery and equipment (M&E) and information and communication technology (ICT) averaged 74% and 57%, respectively, of that invested in the United States. By 2010, on average, Canadian workers had only about half as much M&E and ICT capital stock to work with as their U.S. counterparts.

“Despite record-low interest rates, historically low corporate leverage and a strong Canadian dollar,” he added, “the recovery in investment remains below the average cycle.”

What should Canadian business do? Macklem recommends:

• Don’t count on a weaker Canadian dollar.
• Intensify efforts to develop new markets in fast-growing emerging markets.
• Improve productivity.