NATIONAL POST — The typical bank economist is so boring that a near-death experience would see someone else’s life flash before their eyes.

They are, by nature, irresolute – “on the one hand….but on the other.”

Canadians all crash their cars on the first snow day because we’re idiots

That is why a special report that emerged from National Bank Financial this week was so startling – a compelling, unequivocal look at Canada’s investment climate by chief economist, Stéfane Marion.

His conclusion: “We are bleeding capital.”

CAPTION: Environment Minister Steven Guilbeault has made clear his lack of enthusiasm for small modular nuclear reactors, natural gas and carbon capture technology as bridges to net-zero emissions. PHOTO BY PATRICK DOYLE/THE CANADIAN PRESS


Statistics Canada released its latest figures for the country’s capital stock in 2020 two weeks ago, which suggested investment increased by 1.3 percent last year, down from 1.8 percent in 2019.

But those numbers include government investment in things like infrastructure. Marion stripped out public sector spending to look purely at private sector investment. He found for the first time on record, there was an absolute contraction in our capital stock, as new investment did not cover depreciation – a calamity for a small trading economy like Canada.

While he concedes that COVID played his part, Marion points out that the five-year moving average has seen private investment slowing year-on-year since 2015, when it grew at four percent.

The fall-off in investment in mining and oil extraction explains a large part of the decline but Marion said the manufacturing sector is not faring any better. “Canadian factories are currently operating with the lowest capital stock in 35 years,” he said.

The state we’re in is highlighted by other trends – the Statistics Canada release revealed that investment in residential real estate now exceeds investment in all the other sectors of the economy for the first time since 1961 when data was first recorded.

It is indicative that not even Canadian pension funds see Canada as a good investment opportunity. In the year to September 2021, they bought up foreign equities worth $130 billion – a record outflow of capital that more than offset the purchase of Canadian equities by foreigners. That is happening at a time when Canadian stocks are trading at a record discount – earnings yields on the S&P/TSX are currently 40 percent higher than S&P 500 companies.

Is it a coincidence that the drop-off in investment started in 2015 when the Liberals were elected? To some extent – not even Pierre Poilievre could blame Justin Trudeau for the precipitous drop in the oil price (from $107 a barrel of WTI in summer 2014 to $26 in early 2016), which hit capital expenditure plans in the energy sector.

But Canada’s competitiveness has been adversely impacted by fiscal and environmental policies that have reinforced the idea that projects cannot be built in this country.

The trend toward ESG (environmental, social, and governance) investing has put carbon emissions at the centre of investment decisions, to Canada’s detriment, despite the improvements in sustainability in the energy sector and this country’s strong record on human rights and responsible corporate management.

Marion points out that Canada will remain dependent on the resource sector for the foreseeable future, so it is critical that Ottawa better explain its ESG transition.

Yet instead of championing the efforts of Canada’s energy companies, new Environment Minister Steven Guilbeault has made clear his lack of enthusiasm for small modular nuclear reactors, natural gas, and carbon capture technology as bridges to net-zero emissions by 2050.

But it’s not at all clear how we get to net-zero, without relying on emerging technologies and lower-emissions energy sources.

The beneficiaries of Canada’s failure to sell itself as the best place in the world to build wealth and businesses are countries with questionable track records on ESG like Saudi Arabia and Russia.

As Marion pointed out, this country has a highly successful immigration policy that will soon be attracting 400,000 highly skilled newcomers every year. Yet without foreign investment, Canada will not be able to harness those skills to grow the economy.

And without that growth, we are in trouble. The debt crisis of the mid-1990s happened because interest rates grew faster than the economy. We are not there yet but we know interest rates are likely to rise more quickly than the Bank of Canada had planned, to counter rising inflation.

Marion warned that in a post-pandemic world if Canada’s growth prospects are grim, capital flight could follow.

“Foreign investors are too important to ignore,” he said, with a quarter of federal and provincial bonds, and half of the corporate bonds, held by overseas investors. “Clearly we are not doing well when our own domestic pension funds prefer to invest heavily abroad rather than in Canada.”

The frustration of many people who have looked at Canada’s huge potential in areas like carbon capture is that this country could be a net beneficiary of the transition to a greener economy. But that won’t happen without private sector investment.

Marion is to be commended for being a one-handed economist and setting out Canada’s predicament so starkly.

See more HERE.