The Great Canada Restart: How to inspire a greener and stronger growth era in 2022

2021-12-08 10:59:28 By : Ms. Sophie Lee

If 2021 is the year when Canada emerges from a pandemic recession, then 2022 is the year in which it can accelerate its exit from the decades-long pattern of slowing growth.

Although a recovery from the pandemic is in sight, slow labor growth and a record of sluggish investment and innovation have set low speed limits for the economy.

COVID-19 has accelerated a greener, more digital, and technology-supported society, opening up new growth avenues that can ignite spending, investment, and innovation. Businesses and families work together to promote this change, but their efforts may be hindered by short-term and long-term obstacles.

As new tasks begin, the federal government can help chart new routes. Growth-oriented federal and provincial government policies can form the basis for the increased private investment needed to drive Canada’s growth trajectory.

Other countries are already reshaping their economies to reverse the long-term trend of low and declining economic growth rates. Canada does not want to be left behind. With a skilled workforce, a good track record as a technology and energy innovator, and investment opportunities, it doesn't have to be.

Two scenarios for Canadian real GDP growth

Source: Statistics Canada, Haver, RBC Economics

1. Adopt a new approach to innovative policies 2. Forward-looking policies, public infrastructure and hybrid financing for climate action 3. Promote trade in services and Canadian platforms; protect intellectual property rights and data 4. Improve competitiveness through taxation, competition and regulatory policies5 . Attract, develop and retain new sources of talent 6. Lifelong learning education and labor market policies

Due to some particularly weak sectors, GDP is still declining compared to pre-pandemic levels. But many areas of the economy have recovered or exceeded pre-pandemic levels. Consumer spending close to pre-pandemic levels, strong investment intentions, billions of corporate and household savings, and a favorable external environment will help drive a sustained recovery in 2022, even if companies continue to suffer from supply chain disruption and labor contraction. Struggle. RBC predicts a growth rate of 4.7% in 2021, and as it tends towards its long-term trend, it will drop to 4.3% and 2.6% in 2022 and 2023, respectively1.

With the recovery or cyclical growth coming to an end, we face a new problem. After the once-in-a-century pandemic hit, how can we make the Canadian economy grow stronger? Trend growth-or potential growth-reflects the long-term sustainable production capacity of the economy. Due to short-term "cyclical" factors, actual growth fluctuates around this trend. Trend growth is estimated based on trend labor supply growth and productivity.

Trend growth-or potential growth-reflects the long-term sustainable production capacity of the economy. Due to short-term "cyclical" factors, actual growth fluctuates around this trend. Trend growth is estimated based on trend labor supply growth and productivity.

For more than five years, the country's growth has been dynamic. The real economic growth rate dropped from an average of 4.1% in the 1970s to 2.1% between 2010 and 2019. If we continue the current route, we expect to return to a slow growth trend of around 1.8% per year after 2023, a record high reflecting slow labor growth and low productivity.

Canada is not alone. Many other advanced economies have experienced the same slowdown, which is attributed to the aging of the population, the slowing pace of innovation, and, in some cases, the scars left by the recession. This trend has been stubborn, which shows that potential structural problems will continue to be a powerful force now and in the future.

The next decade may be different. But if Canada is to ensure a new growth trajectory, the private sector must take the lead. Since the pandemic began, the value of liquid assets has increased by 200 billion Canadian dollars - and long-term interest rates are still low - Canadian companies have the ability to do just that.

There is a business case for investment. Consumer surveys show that they continue to want to participate in e-commerce. Canadians want to shop in a responsible manner that benefits local businesses, respects the climate and employee treatment. The increasing labor shortage provides a good reason for improving production efficiency through new investments in automation and equipment.

It is too early to see a surge in business investment, but the early evidence is encouraging: machinery and equipment (M&E) investment is higher than 2019 levels (excluding transportation equipment). Investment in research and development (R&D) and software is also increasing. Trade statistics show that imports of industrial machinery have recovered, and imports of electrical and electronic equipment have increased.

Increased digitization and automation should increase productivity, data, and product development. Digitalization—along with an aging population who tends to consume more services—can create opportunities for expanding trade in services. Decarbonization, mitigation and the development of new green technologies require investment. These changes in the global economy can provide Canadian companies with opportunities to export products and expertise and earn global income, which helps to fund domestic adjustments to the new economy-the new economy has greater expenditure, investment, and innovation And growth.

Getting there will mean dealing with new economic challenges, including changing sources of economic value, which may lead to capital obsolescence and loss of competitiveness. This will mean dealing with skills and job changes and inequalities that threaten unemployed workers. This also means considering where we have performed poorly in the past.

In order to achieve very different growth prospects, Canada needs to see a major shift in actual business investment and innovation.

There is a long-term investment gap between Canada and other economies. The CD Howe Institute found that since at least 1991, non-residential corporate investment per capita in Canada has been lagging behind that of the United States, and the gap widened again in the 1990s, mid-2010s, and during the pandemic. By the second quarter of 2021, for every dollar invested by Canadian companies in the United States, 50 cents per worker will be invested.

Soon after the 2014 oil price shock, the decline in investment in the oil and gas industry was a driving factor that led to Canada's poor performance in the mid-decade. This investment is concentrated on non-residential structures, which is about 60% lower than the pre-pandemic peak and remains weak. For other parts of the economy, the investment gap between Canada and the United States has remained relatively stable, but the absolute gap is particularly large.

The investment gap between Canada and the United States in machinery and equipment (M&E) and intellectual property (IP) is also widening, partly because of the oil and gas industry, but M&E investment in other industries is also weak. After the Global Financial Crisis (GFC), the share of M&E and IP investment in the economy stopped growing.

Given the lag in business investment, it is not surprising that the labor productivity gap between Canada and the United States has narrowed slightly after the global financial crisis, but by 2019, Canada will only produce 74 cents per hour for every dollar worked in the United States.

At the same time, lagging innovation will soon bring bigger problems. As technology advances, more economic value will be encapsulated in data, algorithms, brands, digital services and other "intangible assets." Compared with tangible inputs such as physical capital and labor, these assets are more scalable and bring huge benefits to developers and owners. Economic prosperity will increasingly depend on our transition to an innovative economy. Although innovation and competitiveness are affected by many factors, from policy and demographics to the external environment, business investment is crucial.

To varying degrees, Canada has performed well in international rankings for entrepreneurial ambition, market maturity, venture capital financing, institutions and skilled labor. However, it ranks poorly in terms of other innovation inputs, low corporate R&D investment, low adoption rate of information and communication technology, low per capita scientific activities, imperfect intellectual property system, and low degree of openness to competition. Canada is having trouble converting inputs into innovative output. Its patent activity is moderate, its business creation rate is low, and it is difficult to expand its business into a global exporter. Companies that can export to the world are a signal of economic competitiveness, but for most of the past two decades, net exports have been a drag on Canada’s economic growth.

The result is uneven economic growth. When balanced, growth comes from multiple sectors of the economy—consumption, investment, and net exports. For Canada, the imbalance between the low growth contribution of net exports and business investment on the one hand and the high contribution of consumption and housing on the other means that the economy is more susceptible to individual economic shocks. For example, shocks to the housing sector may directly reduce economic growth by reducing construction and sales, and may force a sudden and costly reallocation of resources to other sectors. With climate action and trade tensions dimming the outlook for Canada’s largest export, crude oil, this imbalance may get worse.

Low interest rates, strong demand and limited supply lead to high and high house prices, and high household debt. These are often discussed as affordability and financial stability issues, but they are also direct economic risks. In addition to the instability caused by housing or employment shocks, they may also represent opportunity costs—important resources that push up fixed asset prices cannot fund other productivity-enhancing investments.

Well thought out: For more than a decade, Canada's housing structure has ranked among the top three in the OECD for the share of investment expenditures. On the contrary, Canada’s corporate investment share has always been the lowest, with the investment share of information and communication technology and intellectual property assets in the lower half.

In addition to the long-standing challenges, there are new obstacles to release spending and investment.

On the one hand, companies trying to deal with higher pandemic debt levels, supplier challenges, and labor shortages may struggle to plan for the future. Small businesses have historically lagged behind in digital adoption, and the pandemic has further increased the additional debt burden of seven out of ten businesses, averaging US$170,004.

There are also obstacles to linking huge climate funding commitments to green projects. Large Canadian companies with US$8 trillion in global assets have pledged to achieve net zero by 2050, but spending on green projects is still far below the US$60 billion we estimate that Canada needs to reach per year5.

Although pandemics, lack of financial resources, and customers’ unwillingness to pay higher prices are sometimes considered barriers to adopting green practices, most companies have not found any challenges6.

Despite growth, green spending is far from meeting demand

Source: Bloomberg, Royal Bank of Canada Economics | *Data as of November 1, 2021

The result of growth will also depend on supply. If the supply of funds is not a challenge, then the availability of some commodities may be. As most of the global economy moves toward a green, digital, and technologically equipped society, the demand for commodities that promote its development will increase-5G networks and network security systems, critical minerals, batteries, electric vehicles, and renewable energy. It takes time to meet this demand. Semiconductor factories and lithium mines may take ten years to develop. The increasingly nationalist agenda pursued by many countries may reduce access to these competing resources.

However, another more localized supply constraint may pose the most significant challenge.

Canada needs talents and skills to reshape the economy. However, the aging population and the changing nature of jobs threaten the disruption of the labor market, which may severely drag down growth. These are not future issues. The economy is already struggling to solve the labor shortage problem, and this shortage will only be exacerbated by the COVID-19 crisis. The pandemic delays in retirement created a potential wave of labor withdrawal in the coming year, and immigration levels have not yet recovered. This is reflected in a third of companies reporting labor shortages and the country's high job vacancy rate of 6%.

These labor shortages will intensify. The aging of the population has led to a decline in the labor force participation rate, which has reduced about 1 million people from the labor force since the peak, and has dragged down the economic growth since the first baby boomers were 65 years old in 2010.

If a higher government immigration goal is reached, it will solve the pandemic’s immigration shortage and help increase the number of available workers. But this is not enough. In order to maintain the population age structure at the level of 2020, the annual immigration target must be doubled.

A large number of talents are still underutilized in Canada. Narrowing the gap in women's participation rate will increase the labor force by another 1.2 million people. Relative to their qualifications, other parts of the labor force are underemployed. Closing visible minority income can increase GDP by nearly US$30 billion per year7. Although it will not increase due to population overlap, narrowing the employment and wage gap of immigrants may increase the GD​​P by US$50 billion per year. Indigenous Canadians are also an important source of untapped potential8, especially considering that they are the fastest-growing youth population.

Having the right number of workers is key, but skills are equally important. If graduating young people have new skills and start working in a new field, the impact of potential unemployed workers can be minimized. However, some education programs have not kept up with the pace of change, and opportunities for comprehensive learning at work may be uneven, and young people may have difficulty obtaining the information needed to make career choices. Despite increasing demand, colleges and universities are facing tuition freezes and limited funding models that rely on high-paying international students.

Employees in their mid-careers face different challenges. Although a tight labor market should encourage more companies to spend on employee training, the jobs of low-wage workers are more likely to be affected by automation and benefit the most from increased skills, but they are also the least likely to participate in automation.

A skilled workforce, world-class educational institutions and an open immigration system give Canada an advantage in the global talent competition. But Canada is not the only country struggling with an aging population. Other countries are also looking for highly skilled immigrants to build a clean and knowledge-based economy.

International companies are using new remote working options to recruit international technical talent. Amazon, Google, Microsoft and Netflix have formulated plans to actively recruit in Canada this year. Although Canadian residents earning wages in Silicon Valley may be good for the local economy, if Canadian companies cannot compete in the international skilled labor market, they may also become a limiting factor for growth.

Canada’s high housing prices can be a challenge: about 60% of Canadian permanent residents end up living in Toronto, Vancouver, or Montreal, but measured by middle income, two-thirds of these cities are the most expensive cities in the world9. For high-income workers, housing prices can even be a challenge. Remote work may help, but knowledge workers may still be attracted to cities.

To avoid missing investment, innovation, and talent, Canada must carefully examine the overall policy framework. Specifically, structural policies—taxation, regulation, competition, infrastructure, education, innovation, and trade policies—must work in concert with sectoral strategies and government spending plans to meet the challenges before us.

Since the beginning of the pandemic, governments have invested heavily in revenue support and other programs—at the federal level alone, it is estimated that approximately US$400 billion in program expenditures (an increase of 50%) have been increased in two years to prevent damage to the labor market. Cause long-term damage and balance sheet. Now, their focus has shifted to "recovery funds" for sectors that are still struggling and a series of economic and social issues. Some of them are not temporary. Governments have launched major structural spending plans, at least at the federal level, and signs indicate that any "fiscal space" will be used to expand spending.

This is not necessarily a bad thing for economic growth. Social infrastructure such as healthcare, community services, and public housing enable individuals to participate in the economy. The pandemic helps to shift the policy perspective to different health and economic outcomes, including long-standing equity gaps. Inequality, especially at high levels, can hinder economic growth due to insufficient human capital development, weak consumption or political instability.

Moreover, people are increasingly realizing that more expansionary fiscal policies may be important to get rid of a low-growth economy. Many economists believe that insufficient government spending has hindered the recovery of the United States and Europe after the global financial crisis. Given that the bond market is relatively optimistic about the high government deficits and low interest rates of advanced economies, the government seems to have more fiscal firepower than they previously thought. Some global economies are experimenting with higher levels of deficit financing public spending to stimulate spending, investment and growth.  

But these relationships cannot be guaranteed, especially if social spending only funds current consumption, does not target the largest equity gap, or discourages employment. Using deficits to finance government projects brings risks: new spending may not bring enough economic growth to cope with future interest rate hikes or other economic shocks.

Canada needs a focused, growth-oriented fiscal plan to balance these risks. Targeted and forward-looking government policies can be the basis for increasing private investment, thereby tilting Canada's growth trajectory.

The challenge may be obvious, but the solution is not so obvious. Past policies have been trying to change direction. An increasingly green, knowledge, and service-based economy may represent Canada’s new growth trajectory, but it needs to be promoted.

There is no single policy solution. Canada needs to deal with the major challenges of the new economy, such as climate policy, intellectual property framework and skills strategy, and readjust the long-term policy framework of the old economy, including taxation, competition and regulatory policies.

A government strategy focused on growth will encourage increased capital investment in technology and process innovation and help Canadian companies expand into global markets. It will also improve Canadians’ achievements in the untapped talent pool, promote a lifelong learning system, and support the transformation of the labor market.

1. Adopt a new approach to innovative policies

Despite the above-average government support, Canada’s performance in commercial R&D investment remains poor. Its innovative approach—providing support through the tax system and heavily biased toward small and medium-sized enterprises—may become an obstacle to innovation output and scale. At the same time, the United States and other countries are increasingly seeking strategies to build economic capabilities and compete for geopolitical dominance in new industries. 10

Canada should test alternative innovation policies, including more support for larger, growth-oriented companies in the core plan. A more targeted, depoliticized, and resource-based industrial strategy that focuses on green and advanced technologies in the North American supply chain can reduce project risks and attract private capital. Government procurement and targeted business support may also accelerate technology adoption.

2. Forward-looking policies, public infrastructure and hybrid financing for climate action

The gap between green financing commitments and investment — and emissions targets and emissions — reflects the lack of projects with clear financial returns. In view of the long-term view, the uncertainty of the decarbonization path and the cost of basic technology is very high. A smaller market for green products means that companies may not be able to pass on the cost of emission reduction to customers, which poses a challenge to the competitiveness of emission reduction companies.

The government can promote more climate action. Carbon pricing should continue to be a key pillar of the plan, rising in a predictable way and applying it more widely. Hard infrastructure such as electric vehicle charging networks and carbon pipelines can help households and businesses more easily invest in reducing emissions. Canada should promote international cooperation in border carbon adjustments to protect domestic industries and at the same time promote international progress in climate goals. Policy strategies can develop clear pathways for sectors ranging from oil and gas to agriculture, and promote a mixed pool of public, private, and indigenous capital for the early technologies that we may need by 2050.​​

3. Promote service trade and Canadian platforms; protect intellectual property rights and data

Canada is a net exporter of R&D services and a net importer of intellectual property rights, which shows that Canada has not retained the ownership of its intellectual property rights, but leased it back from foreign companies. Foreign technology companies are monetizing Canadian data assets. Since scalable intangible assets drive great value, this may be a missed opportunity to promote the growth of Canadian companies and service exports. A wide range of services, from healthcare to software, to digital services embedded in the Internet of Things, are all ready for growth.

Canada needs to consider concluding trade agreements to resolve obstacles to expanding global trade in services. It needs to review its intellectual property system to incentivize intellectual property retention and outline data rights. The taxation level of the global platform should be the same as that of Canadian intermediaries, and the tax incentives of multinational companies should be time-limited, and public funds should focus on local procurement rather than employment. Policies can support the development of Canadian local business, education and tourism platforms.

4. Improve competitiveness through taxation, competition and regulatory policies

The expectation of more public spending has raised concerns about future tax increases and created uncertainty that may limit investment. Canada's tax system has not been reviewed since 1967, and it has deviated from the core tax policy principles of efficiency and simplicity in important respects. Canada’s low international ranking in terms of foreign direct investment openness may hinder innovation, and inter-provincial trade barriers may reduce the economy by as much as 3.8% each year. 11

Canada should conduct a tax policy review to simplify tax expenditures, ensure competitive personal taxation (including international technical talent), encourage more public and private investment, encourage reinvestment and longer investment periods, and target new and growing taxes Support-oriented enterprises. Regulatory policies, especially in the context of inter-provincial trade, also need attention.

5. Attract, develop and retain new sources of talent

For a long time, affordable childcare and flexible working hours have been considered the main obstacles to women’s participation in the workforce. At the same time, the challenges of new immigrants’ integration into the labor market, and the opportunity gap between indigenous people and some visible minority groups, have led to underutilization of other abundant labor resources.

By targeting the largest affordability and access gaps, national childcare can have a significant impact, and national standards in the early learning system can help expand the next generation of talent. Perpetuate the higher immigration goal of about 1% of the population each year, update the special visa program, conduct a more forward-looking assessment of labor market gaps, recognize foreign certificates and provide greater pre-arrival labor market support, which can increase the participation of immigrants Spend. Underrepresented groups should be encouraged to develop new green and digital skills.

A good housing market policy is a good labor market policy. Governments at all levels need to coordinate the systematic review of housing policies to resolve supply-side constraints, straighten out demand-side policies, resolve inequality issues, and ensure financial and economic stability.

6. Lifelong learning education and labor market policies

Although the proportion of adults participating in on-the-job training is relatively high, Canada has the largest gap in participation in the OECD. 12 Companies are most likely to receive training.

Canada should explore redesigning the income support program to allow more skills retraining at work. Policy makers should update the skills strategy for green skills and Canadian training benefits, and explore national tuition standards to balance acquisition and income needs. Provinces should study the rapid skills retraining programs of various departments to expand the effective scope, accelerate the integration of skills trade and digital and coding skills into their K-12 curricula, and provide support for collaborative methods and common platforms to better help small and medium-sized employers Prepare for their skills and training needs.

1. The central bank weighs inflation, a new variant – PDF (contently.com) 2. Business Outlook Survey – Q3 2021 – Bank of Canada 3. Commentary_606.pdf (cdhowe.org) 4. EN Small Business Debt: COVID -19 Impact – Update August 2021 (cfib-fcei.ca) 5.2 Trillion Dollar Transformation: Canada's Road to Net Zero (rbc.com) 6. Daily-Canadian Business Status Survey, third in 2021 Quarterly (statcan.gc.ca) 7. Rebuilding the Canadian labor market: an inclusive recovery is imperative – RBC Economics 8. untapped-potential.pdf (rbc.com) 9. Demographia International Housing Affordability – 2021 Edition (fcpp.org) ) 10. Trading venue: Canada’s changing global economy-Royal Bank of Canada Economics 11. ca-en-the-case-for-liberalizing-interprovincial-trade-in-canada-aoda.pdf 12. Canadian labor force Skills | Workforce innovation to foster a positive learning environment in Canada | OECD iLibrary (oecd-ilibrary.org

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