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  • Ted Woodhead

When virtually everyone thinks there's a problem, it is almost certain there is a problem

Updated: Apr 25

On March 26, 2024 Carolyn Rogers, Senior Deputy Governor of the Bank of Canada gave a speech in Halifax that garnered at great deal of attention. The theme of the speech was Canada's poor productivity. To say Canada's productivity is poor is a bit of an understatement. Canada's productivity is woefully bad. Canada has endured six straight quarters where productivity fell. This is precisely the opposite of what is happening in the United States. Canada's productivity has not moved from where it was seven years ago. That isn't just a problem, it's a huge problem and it has plagued Canada for years.

Senior Deputy Governor Rogers explained the severity of the problem in this way, "You've seen those signs that say, in an emergency, break glass. Well it's time to break glass." Low productivity tells us that Canadian businesses are not all investing capital in tools that will increase productivity. Canada has relatively poor technology adoption. That too, is a vexing problem that adds to Canada's poor productivity not just relative to the United States but relative to virtually every other advanced economy. Canada generally has an innovation problem. Low investment and productivity lead to less innovation. Another persistent problem is that low productivity fuels inflation and suppresses wage growth. None of those are favourable trends and Canada is suffering from all of them.

Against this dire back drop the Industry Minister is trying to gin up competition in every sector, including telecommunications, one of the prime providers of technologies that make people more more productive. In the words of Senior Deputy Governor Rogers, "the smart phone in your pocket has way more computing power than the spaceship that first took humans to the moon". To put it in simple terms "way more" is approximately 100,000 times more.

So, why the vilification of the telecommunications companies who are perennially investing and are capital intensive industries that provide the very underlying networks and tools that would improve productivity? Why does the Minister portray the traits of of an economic Czar in a centrally planned economy. Personally, I have no idea, but I do know that is tragically wrong headed.

The news got more dire today in an excellent piece by Matt Lundy in the Globe and Mail. The article refers to a report released yesterday by Statistics Canada that noted that Canada's economic output on a per capita basis has slipped to seven percent below its long-term trend, amounting to a decline of roughly $4,200 a person. To return to trend over the next decade would require Canada to grow at an average annual rate of 1.7 percent (since 1981 the trend has been 1.1 percent), or in other words, similar to the United States. Real GDP has fallen to levels not seen since 2017. Poor productivity leads to low growth in GDP, because Canada as a whole is less efficient than peer nations. In the Budget on April 16th Lundy reports that the Government pushed back noting that high levels of immigration have skewed the numbers. That is not entirely true if the Government would prioritize immigration to people with skills we need.

Another contributor to poor productivity is over regulation and a lack of certainty. Regulations can cause companies to invest less or not at all domestically and shift their investment to more attractive investment jurisdictions. This is not a result that is either desirable or, an antidote for persistently low or even negative growth in domestic productivity. It is a contributor to it.

Increased digitalization is something we need if we are to grow real GDP at more ambitious levels. Digitalization puts the tools telecommunications companies provide into businesses across the economy and would make us more efficient. The Government has failed to address technology adoption. Instead, the Minister of Industry is single-minded in his determination to reduce prices and reduce profits which doesn't bode well for wage growth. The Minister is equally single-minded in his use of his regulatory cudgel to, among other things, create competitors through wholesale schemes that thwart further investment in telecommunications networks and have thus far led to significant layoffs across the industry. If telecommunications companies resist investing further in their networks or expanding them, Canadians will be deprived of the very tools they need to increase productivity and real GDP.

I will conclude with a post from Harley Finkelstein, President of Shopify who was representative of a large number of people in the entrepreneurial class post Budget. "We need to be doing everything we can to turn Canada into the best place for entrepreneurs to build. What's proposed in the federal Budget (raising the capital gains rate) will do the complete opposite. Innovators and entrepreneurs will suffer and their sucess will be penalized -- this is not a wealth tax, it's a tax on innovation and risk taking. Our policy failures are America's gains. At a time when our country is facing critically low productivity and business investment our political leaders are failing our country's entrepreneurs".

It's time to break the glass!!!


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