Key Takeaways:
- Canada’s stock market has generated only 60% of the returns of the S&P 500 since 2015
- Canadian businesses are investing 20% less in machinery and equipment per worker than they did 10 years ago
- Spending on research and development is low and declining relative to other top economies
- The country needs to see directional change to become an attractive place for capital and to improve its economic vigour
- The federal budget targets a $1-trillion increase in total investment over the next five years to address the issue
Introduction to Canada’s Investment Problem
Canada has a major investment problem that has been plaguing the country for over a decade. Chronic underinvestment has sapped the country of the economic vigour that made it the world’s 10th largest by GDP. The problem is deep-seated and has only gotten worse over the past decade. Canadian businesses are now investing 20% less in machinery and equipment per worker than they did 10 years ago, and scores of major projects, particularly in the resource sectors, have been shelved over that time. Spending on research and development is low and declining relative to other top economies. The Canadian stock market has generated only about 60% of the returns of the S&P 500 since 2015, making it an unattractive place for investment.
The Performance Gap Between Canada and the US
The performance gap between the Canadian and US stock markets is staggering. Since 2015, the S&P 500 index has risen by 235%, compared with 140% for the S&P/TSX Composite Index. In dollar terms, a $1,000 investment in Canadian stocks would have grown to about $2,400 over that time, while American stocks would have left you with $3,400 – a difference of 40%. The reasons for this performance gap are varied, but a major contributor is the US tech sector’s dominance. However, even if you remove the tech sector from the equation entirely, corporate Canada still falls short on profitability. Canadian companies invest less in their businesses, are less productive, and earn less as a result.
The Need for Directional Change
The need for directional change in Canada’s investment landscape is urgent. Trevor Tombe, an economics professor at the University of Calgary, estimates that it will take at least until the middle of the century to close the productivity gap and make up the ground that’s been lost over the past decade. The federal budget unveiled last month targets a $1-trillion increase in total investment over the next five years, which is a step in the right direction. The budget has been accompanied by two rounds of major projects meant to expand export capabilities to non-US markets and refocus the national agenda on resource development. Additionally, the agreement between Ottawa and Alberta for a potential new oil pipeline to the West Coast has been hailed as a major step towards making Canada investable again.
The Challenges Ahead
However, nation-building is messy business, and the proposed pipeline has brought the country’s economic revival into conflict with climate concerns, Indigenous rights, and provincial autonomy. Turning around a $3.2-trillion economy was never going to be neat and tidy. The moment requires Canada to be urgently ambitious and to find a way to balance its economic needs with its social and environmental responsibilities. The country cannot just wait out Donald Trump, and tariffs are not likely to vanish even when he vacates the Oval Office in three years. Canada needs a course correction, and it needs to start now.
Conclusion
In conclusion, Canada’s investment problem is a complex and deep-seated issue that requires a comprehensive and urgent response. The country needs to see directional change to become an attractive place for capital and to improve its economic vigour. The federal budget and the agreement between Ottawa and Alberta are steps in the right direction, but more needs to be done to address the challenges ahead. Canada needs to find a way to balance its economic needs with its social and environmental responsibilities and to become a leader in innovation and productivity. Only then can the country hope to close the productivity gap and make up the ground that’s been lost over the past decade.