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Martin Pelletier June 26, 2018
Capital investment is the lifeblood of the economy, and although Canadians like to think they are important, the fact is that Canada is a small fish in a massive ocean full of competitors for that capital.
That means our government has a huge responsibility when it comes to creating an environment that is conducive to risk-taking and attractive to investment, and that our central bank must help back that up by providing an additional layer of economic stability.
Unfortunately, we think that the decisions being made in Ottawa are doing the opposite by de-incentivizing the country’s citizens and corporations from taking risk.
For example, why would one leave a safe government job with a golden defined benefit pension plan to start a business when you cannot pass dividend income to capital partners who happen to be family members (often the only place from which to initially obtain capital) or save up for retirement and/or future capital projects without being penalized? Throw in higher municipal taxes, carbon taxes and minimum wage hikes and the situation grows more dire.
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Actually, we were quite surprised at the government’s level of aggressiveness towards small business owners. While some of the initial measures have been walked back, the suggestion that one of the groups that contributes the most to this country’s growth is somehow comprised of tax scammers or cheats is indicative of just how out of touch Ottawa has been.
According to the Business Development Bank of Canada, there are 1.1 million small and medium size enterprises (SMEs) in Canada representing 54.2 per cent of the total economic output produced by the business sector. From 2002 to 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 south of the border fall to 21 per cent from 35 per cent, effectively ending the incentive for corporate inversions. The current wait-and-see approach is almost guaranteed to put the Canadian economy further behind.
This also does nothing to address the variance in corporate confidence here and south of the border. According to a recent annual report from the Institute of Corporate Directors, only one-third expect the Canadian economy to improve in the next two-to-five years. Compare this to the U.S. where the Business Roundtable CEO Economic Outlook Index remains near historic highs.
Then there is the oil and gas sector, which contributes nearly four times as much to our economy as the auto sector does. The level of uncertainty around pipeline constraints beyond TransMountain and increased regulatory burdens have not only impeded 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. Meanwhile, spending in Canada’s oil and gas sector has been halved over three years, according to CAPP.
Adding it all up, since the federal government took power in 2015 the amount of foreign direct investment into the country has been cut in half.
According to Bloomberg, foreign acquisitions of Canadian businesses have also fallen to their lowest level since 2009.
Finally, the Bank of Canada is responding to this by being rather hawkish with their interest rate outlook, with many still expecting a rate hike at their upcoming meeting in July. We’re not quite sure how hiking rates will create stability at a time of heightened uncertainty around NAFTA and consumer confidence that is eroding alongside a real estate market that appears to be rolling over.
As a citizen one does not have a lot of options, but one certainly does as an investor. A great place to start is to measure one’s exposure to Canadian equities and especially those segments that are highly dependent on government regulation, foreign capital and interest rates.
And for perspective, it is good to remember Canada’s GDP represents only 2.47 per cent of the world economy, according to Trading Economics.
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