Canada’s Falling Productivity Eroding Living Standards, Attracting Private Capital a Solution: REPORT

Canadian Labour Productivity and Investment falling, private capital a solution cover

The National Bank of Canada’s (NBF) financial division has released a report highlighting concerns about the country’s labour productivity and investment trends [1]. Sourced from government data, NBF shows that despite Canada posting its first labour productivity gain in seven quarters in Q4 2023, last year will go down as the worst sequence in more than four decades.

According to Nobel Laureate Paul Krugman, "Productivity isn't everything, but, in the long run, it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker," via NBF’s report.

Canada’s poor labour productivity and faltering investment levels have eroded living standards over the past several years, says the bank. However, attracting new private capital could turn things around for the country.

Canadian Labour Productivity is Falling - National Bank of Canada

Report Highlights:

Compared to the U.S., which has seen labour productivity grow for the second time in three years in 2023, Canada’s productivity gap with our closest ally has been widening for over two decades and has become acutely worse since 2018.

Canadian labour productivity versus the United States - 1990-2023

Canada’s gross domestic product (GDP) per capita was down to 76% of U.S. levels in 2023.

Canada standard of living versus the United States

Canada is home to one of the most educated workforces in the world, but what our country has in talent is more than offset by a lack of private investment.

Canada real gross domestic product down to 76 percent of United States

Business investment in machinery and equipment has dropped since mid-2022, with data showing no sign of a rebound in early 2024.

Canadian business investment continues to fall - NBF

In 2023, Canadian investors bought $53 billion in foreign securities, while foreign investors purchased only $32 billion of Canadian securities, the smallest amount in 16 years. As a result, international securities transactions resulted in a net outflow of $20 billion (or 0.7% of GDP).

Canada is bleeding capital, the most since 2007

Canada’s 2023 performance was exclusively driven by foreign investors' shunning of Canadian equities, who reduced their holdings of Canadian shares by a record $48.7 billion (1.7% of GDP).

Canadian net stock investment down significantly in recent years - NBF

While foreigners were busy selling Canadian stocks last year, Canadians were busy buying up a net $15.7 billion worth of foreign stocks. As a result, international equity transactions resulted in a net outflow of $64.4 billion from Canada last year, roughly 2.2% of the country’s GDP—the worst performance on record outside of recessions.

Canada worst stock and equity transaction performance outside of a recession

The International Monetary Fund (IMF) forecasts unprecedented public debt levels in advanced economies, meaning there will be little room for large government spending initiatives. This will make the global race to attract private investment capital even more competitive.

international government debt skyrocketing

Private Investment is Key to Canada’s Future

NBF concludes that private investment is the life force behind any economy; without it, development and innovation, including the potential for progress, stall. Furthermore, reviving business investment and labour productivity in Canada will be challenging when foreign and domestic investors are putting their cash abroad.

Canada urgently needs a friendlier business environment to narrow its labour productivity gap with the United States. Major investors must be provided the opportunity for long-term domestic investment across various industries. This will be the only way to avoid further erosion of Canada’s generally high standard of living, says the report.

Natural Resources = Private Investment

British Columbia Economy Contributions by Sector 2019

The responsible development of Canada’s vast wealth of natural resources could help kickstart private investment nationwide.

From the offshore oil reserves of Newfoundland and Labrador to the uranium mines of Saskatchewan to the natural gas reserves of British Columbia, Canada is full of opportunities to develop its resources that are in growing demand worldwide.

Look no further than LNG Canada as a great example of what resource development can do for the economy. At $40 billion, it was the largest private-sector investment in Canadian history [2]. Additionally, with an expected start date in mid-2025, LNG Canada [2]:

Employed more than 30,000 workers, with almost 9,000 employed at the Kitimat construction site in January 2024 alone

Has spent $4.7 billion in cumulate on contracts and subcontracts to local, Indigenous and other businesses in B.C, including $3.8 billion to Indigenous-owned and local area businesses

Has a $500 million contract with HaiSea Marine, a joint venture between Haisla Nation and North Vancouver-based Seaspan, to provide harbour and escort tugboat services for LNG Canada’s tankers with its innovative fleet of battery-powered and low-emissions boats.

The writing is on the wall.

According to the National Bank of Canada’s report, our country must stimulate private-sector investment if we want to maintain our standard of living. The responsible development of our natural resources is a great way to attract that capital and ensure a strong economy for Canadian and Indigenous communities for generations to come.

SOURCES:

1 - https://www.nbc.ca/content/dam/bnc/taux-analyses/analyse-eco/etude-speciale/special-report_240311.pdf

2 - https://www.biv.com/news/resources-agriculture/lng-canada-project-kitimat-begin-startup-2024-8294614

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