What the GDP numbers say about Canada’s great economic divide

StatsCan’s GDP report shows—again—that Canadian households are the only thing keeping the economy afloat, while business investment has gone AWOL

Builders work on the the roof of a new home under construction in the Montreal suburb of Brossard, August 10, 2010. Canadian housing starts fell in July for a third straight month and new home prices rose less than expected in June, further evidence that the housing boom that helped drive the country's recovery from recession is starting to stall. REUTERS/Shaun Best   (CANADA - Tags: BUSINESS) - RTR2H7WP

REUTERS/Shaun Best

Rise and be heralded, ye acquirers of quartz countertops. Take a bow, brave homebuyers from coast to frothy coast. Hear, hear, to the multitudes driving off dealer lots in your new Bimmers and F-150s. If it weren’t for you, plucky Canadian consumer, this country’s economy would really be in a pickle. Oh, sure, Canada tripped into a technical recession. You didn’t completely rescue us from that. But we’re not blaming you. At least you tried. Please check your mailboxes in the coming weeks for an exciting new credit card offer from your bank.

That Statistics Canada’s second-quarter GDP report confirmed a recession was upon us in the first half of the year didn’t come as much of a surprise. Between April and June, the economy shrank by 0.5 per cent on an annualized basis, after contracting by 0.8 per cent in the first quarter. And, as expected, the news has been taken up by opposition parties in the election campaign to attack the Conservatives, while the Conservatives seized on a one-month GDP gain in June to assure voters everything is just fine.

What this latest GDP report has done, though, is re-expose a deepening division in the Canadian economy that’s been with us for a while now: As giddy as households are to borrow and spend, businesses have curled themselves up into a fetal position, afraid to put their money to work here at home. Consider the numbers. In the second quarter, household spending posted an impressive gain of 0.6 per cent, while business investment fell two per cent. This, in turn, raises the big question facing us today: Are Canadian businesses right to be as pessimistic as they are? Or are households right to be as optimistic about the economy as their multi-year, debt-fuelled consumption binge suggests?

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All the ingredients would seem to be in place for Canadian companies to drive growth. They’re flush with cash; Canadian non-financial companies have amassed a cash hoard of nearly $700 billion, which former Bank of Canada governor Mark Carney described as “dead money” back in 2012—or nearly $200 billion ago. Canadian businesses also enjoy the lowest marginal tax rate on new investment of any country in the G7. Then add in the plunging value of the loonie—a gift to exporters, courtesy, in part, of the Bank of Canada’s rate cuts.

So what’s missing? Confidence that their investments in Canada will bear results for their shareholders that outweigh the risks.

Companies have been upfront about their dour outlook. In July, StatsCan released the results of a survey of companies’ spending plans for 2015, showing that, for the first time since 2009, they expect to spend less than the year before, down 4.9 per cent. A lot of that is due to the collapse in oil prices, and the knock-on effect for energy producers and suppliers. But not all of it. Likewise, the oil rout is a major factor in the onset of the recession. But, well before oil fell, business investment in Canada was consistently disappointing.

It’s not that Canadian companies have been sitting on their hands, mind you. Businesses have been investing abroad at an impressive pace. And that’s to be commended. This country has a deplorable deficit of world-beating corporations. But the extent to which companies choose to deploy their capital abroad, and not here, is effectively a vote of non-confidence in Canada’s economy.

Consumers, on the other hand, couldn’t be more bullish. At least, that’s what their actions suggest. Vehicle purchases, which hit record highs in recent months, drove the biggest increase in household spending last quarter, while strong gains for real estate brokers and the renovation sector show that enthusiasm for the housing market is alive and well.

Yet it’s not as if consumers are drawing inspiration from their paycheques. The annual growth in wages and salaries, which has been steadily slowing since peaking in early 2011 at six per cent, fell to 2.7 per cent in the second quarter. Instead, as they have for years now, households went deeper in the red, saving even less in the process.

What we have in Canada are households engaged in a massive gamble that the economy will pick up, and that the weakness we’ve seen will not spill over into the job market, thereby threatening their ability to manage their debts. (All of this, of course, presupposes that consumers behave at all rationally when confronted with free money. The jury is out on that one, too.)

In asking who will be proven right in the months to come—upbeat households or timid businesses—the key thing to remember is that businesses have far less to lose if they’re wrong; some missed opportunities, perhaps. Households, on the other hand, now carry enormous debt burdens that will become even more difficult to manage if things get worse.

Then again, if consumers even begin to retrench at this point, the main pillar keeping the economy afloat would be gone. In which case, we’d all lose.

Shop on, Canada.


What the GDP numbers say about Canada’s great economic divide

  1. Ah yes, the good ol’ trickle down approach: cut taxes (especially corporate taxes) and companies will hire, invest in new technology, expand etc.
    Or…rake in more profits, sit on mounds of cash while not hiring nor investing.

  2. the question isn’t why companies are sitting on mounds of cash….it is why they aren’t investing the money to see a return. Clearly, they aren’t investing because they don’t think they will see a big enough return to make the risk a viable course of action. Money sitting in an account doesn’t make anything…it’s just “dead” as described above.

    And, if you think they aren’t investing now…..wait until you see them shove off if the NDP or Trudeau get in.

    • Yes, yes. They will flee in droves. It is only logical; only Harper can save us

      • Daman,

        It is not government that creates revenue generating jobs; it is the private sector. If we elect a Government that punishes successful companies, these companies will leave.

        It is so simply, even you should be able to grasp the concept.

  3. And yet, people say raising corporate taxes will drive out investment. No it won’t. The drop in investment in oil and gas is the latest example that there is much more to the investment decision than taxes – increasing supply from low cost competitors (US shale, Iraq and soon Iran), and weak demand growth is driving down the price of crude. We went through something similar a few years ago in North America with shale gas. One minute we were all about importing LNG, a few years and billions of dollars on LNG gasification plants later, we now need to export LNG and we need a few more billions in liquefaction plants. Corporate tax rates are swamped by these other factors.

    • Fred,

      You are correct to a point. Corporate tax increases of a moderate level won’t drive out investment, as corporations will simply pass along the costs to consumer. Corporate tax increases are simply Canadian citizen tax increases. If you want to know what stops investment or drives business away, just look to Ontario under the Liberals for a preview. the Liberal policies since they have been in power has resulted in the province becoming a “have-not” province, having our credit rating downgraded, and forcing businesses to leave Canada altogether and going to the USA. The Green Energy act is the main culprit as it forces energy costs too high to be competitive. If you really want to see business leave…wait until the Libs bring in their Ontario pension plan.

      If kathleen Wynne and her libs paid as much attention to attracting business, as they pay to teaching kids about gay sex and transgender issues…we wouldn’t have a problem.

  4. According to our leaders, economic growth has to do with lowering or raising taxes.
    But it seems that most of these issues circle around the policies of the Federal Reserve and some central banks that are loaning lots of money at very low rates, often in an effort to stimulate their own economies. This has led to low commodity prices as producers can start projects that offer a lower return on investment. So oil revenues in places like Alaska and Alberta decline because of shale oil production financed by cheaper, easily available loans. Since this has happened to almost all commodities in the past 5 years and Canada’s economic growth has been mostly from commodity exports, it makes sense that there’s not a lot of economic growth in Canada now. But again, none of the leaders say this so it could all be my imagination.

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