Canadian Economy Rolling Back
Posted by BANKUS on June 28th 2018
Capital investment is the blood of an economy, and although Canadians believe their country is an important world player, the truth is that Canada is a small fish in a massive ocean full of competitors for investment. For that reason the Canadian government has a big responsibility in creating an environment that is prone to risk-taking to attract investment, and for that to be possible the Canadian central bank has the responsibility to provide a layer of economic stability.
Canada’s GDP represents only 2.47 per cent of the world economy, according to Trading Economics.
However it seems that the decisions being made in Ottawa are actually doing the opposite by demoralizing citizens and corporations from taking risk on investment. As an example, why would one leave a safe government job with a great defined benefit pension plan to start a business when it is difficult to pass dividend income to capital partners who happen to be family members, or save up for retirement and/or future capital projects without being penalized?
The level of aggressiveness towards small business owners by the government is very surprising. While some of the initial measures have been walked back, the suggestion that one of the groups that contribute the most to the country’s growth is somehow comprised of tax scammers shows how much out of touch Ottawa has been.
According to the Business Development Bank of Canada, there are 1.1 million small and medium size businesses in Canada representing 54.2 per cent of the total economic output produced by the business sector. Between 2002 and 2012 small businesses were responsible for 77.7 per cent of all the jobs created in the private sector.
Moving up the corporate ladder, Ottawa is failing to respond to a direct competitive threat from U.S. corporate tax cuts which will see rates drop to 21 per cent from 35 per cent, effectively ending the incentive for corporate inversions. The current approach is almost guaranteed to put the Canadian economy even more behind. According to a recent annual report from the Institute of Corporate Directors, only one-third believes the Canadian economy to improve in the next five years. Comparing this to the U.S. where the economic outlook index remains near historic highs. Also the oil and gas sector, contributes nearly four times as much to the Canadian economy as the auto sector does. The level of doubt around pipeline constraints beyond TransMountain and increased regulatory regulations have not only stopped capital investment but resulted in a mass exodus, with $30 billion worth of recent divestitures by Royal Dutch Shell Plc, ConocoPhilips Co., Statoil ASA and Total SA.
Adding it all up, since the federal government took power in 2015 the amount of foreign direct investment into the country has been cut by half. According to Bloomberg, foreign acquisitions of Canadian businesses have also fallen to their lowest level since 2009. The Bank of Canada is trying to respond to this by increasing their interest rate at their upcoming meeting in July, however is a bit unclear how hiking rates will create stability at a time of uncertainty around NAFTA and consumer confidence that is decaying alongside a real estate market that appears to be rolling over.