Ongoing trade uncertainty could extend decades of underinvestment in Canada, according to one economist.
Royal Bank of Canada Senior Economist Claire Fan said in a report Wednesday that following a difficult two decades, overall real business investment is essentially unchanged since 2005, despite a rebound in planned business capital expenditures recorded in a Statistics Canada survey.
“Overall, another round of weak investment spending risks extending Canada’s decades long productivity crunch, turning trade threats in the near-term into structural damage in the economy that can’t be easily reversed,” she said.
Statistics Canada’s annual survey on business investment intentions, released Wednesday, indicated that private firms have planned to spend 5.5 per cent more on investments this year, to reach $388.6 billion.
However, Fan noted that the survey results pre-date escalations in trade tensions between Canada and the U.S. As a result, she said it means planned investments in 2025 are “likely overstated,” especially for the manufacturing sector due to its heightened exposure from integration with the U.S.
“As much as a tick higher in planned spending in 2025 is good news, it isn’t nearly enough to reverse the slump in Canadian business investment over what has already been a (mostly) challenging two decades – spanning the 2008/09 financial crisis, the 2015 oil price collapse, the 2020 pandemic, and the 2022/23 inflation/interest rate shock,” Fan said in the report.
Recently, the report noted the level of real investment has lagged behind? rapid increases in population, meaning real investment on a per-worker basis has been “outright contracting” and has reached levels similar to that of two decades ago.
Low investment to ‘reverberate’
The report says weak investment levels are likely to “reverberate” and weigh on productivity growth in Canada’s economy going forward.
“Weak business investment trends among Canadian businesses are not a result of a lack of funds. In fact, businesses as a whole are still sitting on a stockpile of cash,” the report said.
“By our count, non-financial corporations’ holding of cash and deposits was at $992 billion as of Q3 2024, or 32 per cent of Canadian GDP (gross domestic product), comparing to an average of 26 per cent of GDP in pre-pandemic 2019.”
Without productivity gains, Fan says Canadian wages and living standards will not rise.
“This is one way that near-term trade uncertainties, outside of dampening investment decisions and GDP growth in this moment could also have further-reaching negative impact on the economy down the road,” she said in the report.
“The structural underperformance in productivity growth, due to persistent under-investment basically means there will be a speed limit on how fast the Canadian economy can growth in the long run, beyond the next four years.”
