Canada’s economy can’t afford a slump in business investment: RBC report

A new report released Wednesday by RBC Economics indicates a mild recession is expected in Canada this year but “dogged” labour shortages are pushing businesses to invest more despite recession worries.

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“Recession fears or not, Canadian businesses are looking to invest more in their operations this year. And given the pressures we’re facing, that’s a very good thing for future productivity growth. Demographic headwinds mean labour will remain in chronic persistently short supply, making better-equipped, more efficient operations essential. Indeed, the baby boom generation is already hitting retirement age in greater numbers. And sluggish growth in available hours worked means businesses will need to use those hours more efficiently,” said the report.

“The recent bout of financial market stress has central banks, like the U.S. Federal Reserve, re-thinking how high to push interest rates. They are walking a fine line between under-hiking rates (and failing to get inflation under control), and over-tightening (causing a larger economic downturn than necessary). One of the key reasons to fear the latter—beyond the obvious direct effect of higher unemployment—is that it could prompt businesses to tighten their belts at a time when we need them to invest. This would leave a lasting bruise on productivity growth in the years ahead.”

The report said Canadian business investment is just now recovering from a precipitous 19 per cent pandemic drop.

“But a return to the status quo (i.e. pre-pandemic levels) won’t be enough to hold our ground against these forces. The 23 per cent decline in Canadian business investment following the 2008/09 recession—and the slow recovery that followed—was still dragging on worker productivity growth heading into pandemic. In the decade leading into the crisis, the contribution of capital investment to growth in output per hour worked was just 0.4 per cent per year, a third of the decade prior. In the capital-intensive manufacturing sector, it outright declined,” said the report.

“Canada’s productivity performance since the pandemic has been lacklustre. Output per hour at the end of 2022 was essentially unchanged from pre-pandemic (Q4/2019) levels despite a large shift of workers into industries with higher productivity. Though broadly in line with the experience of most other G7 economies, that’s well behind a four per cent jump in output per hour worked in the U.S.

“Another bout of soft investment spending would further weigh on Canadian worker productivity—just as an aging population intensifies labour shortages.”

The report said businesses plan to spend 4.3 per cent more this year than last, according to Statistics Canada’s annual capital expenditure intentions survey.

“That’s consistent with our own forecast for a 1.5 per cent increase in business investment in 2023 (excluding price impacts.) While not exactly strong, that would mark the first time on record that business investment outperformed GDP growth during a recession. In Canadian recessions dating back to 1981, investment fell at an average of three times GDP,” said RBC.

“There’s greater optimism this time around, partly because the coming economic downturn is expected to be ‘mild’ and, for now, order books are still full. But businesses are also keenly aware that labour shortages have been a persistent, and intensifying, challenge for most of the last decade and will remain after the next downturn.

(Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He worked for 35 years at the Calgary Herald, covering sports, crime, politics, health, faith, city and breaking news, and business. He works as well as a freelance writer for several national publications and as a consultant in communications and media relations/training. Mario was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list)