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Opinion: Ottawa must aim its fiscal powers at lagging business investment in the next phase of recovery – The Globe and Mail



People navigate through Yorkdale Mall in search of Black Friday sales in Toronto on Nov. 26, 2021.Tijana Martin/The Canadian Press

In a prebudget consultation last winter, Bank of Nova Scotia chief economist Jean-François Perrault warned Finance Minister Chrystia Freeland that she was in danger of oversubsidizing labour at the expense of capital. Nine months further along an economic recovery that has become complicated by labour shortages, he’s stressing that point to her again.

“It’s certainly my view that [government policies] have favoured supporting the labour side versus the capital side in the pandemic. There’s no question,” he said in an interview this week.

“There needs to be something to turbo-charge Canadian investment.”

Mr. Perrault delivered that message to Ms. Freeland personally last week, as the Finance Minister met virtually with a panel of senior private-sector economists – the traditional consultation in advance of the government’s fall economic and fiscal update, promised for sometime in the next three weeks. This week’s third-quarter gross domestic product report from Statistics Canada underlines the point that the recovery is top-heavy on the consumer side, while business investment brings up the rear.

While real GDP (that is, excluding inflation) expanded at a brisk 5.4-per-cent annualized pace in the quarter, the main driver of that growth was household consumption, which surged nearly 18 per cent annualized. Business gross fixed capital formation, on the other hand, contracted nearly 18 per cent, its second consecutive quarterly decline. Since the start of the pandemic, household spending is up 2 per cent, in real terms; business investment in non-residential structures, machinery and equipment is down 11 per cent.

It’s not as if the private sector lacks the money. Canadian Imperial Bank of Commerce economist Benjamin Tal estimates that during the pandemic, the collective stockpile of corporate cash is about $175-billion higher than its prepandemic trend.

There are some encouraging indications – most notably, from the Bank of Canada’s fall Business Outlook Survey – that the private sector may be prepared to loosen its purse strings considerably. That quarterly report showed that capital spending intentions over the next 12 months are the highest in the 23-year history of the survey.

But the reality is that the government’s economic policies in the pandemic have done remarkably little to stimulate business investment, while delivering a great deal indeed to protect the labour market and support household incomes.

As the economy has recovered, that significantly tilted the scales in favour of hiring rather than capital spending. That may have contributed to the labour crunch many businesses and sectors are now experiencing.

“If we had somehow found a way to steer more dollars to encourage capital spending, as opposed to maintaining the labour force as it was, perhaps we wouldn’t have a million job vacancies now,” Mr. Perrault argued. “Perhaps firms would have taken the last 18 months to try and rethink, retool, invest, in a way that would make the expansion less labour-intensive.”

This certainly isn’t an issue unique to Canada. In a global economic outlook published Wednesday, the Organization for Economic Co-operation and Development worried that governments’ fiscal focus is still too much on emergency measures to lean against the impact of the pandemic, and not nearly enough on the building blocks for a strong recovery.

“We are more concerned by the use made of debt than its level,” OECD chief economist Laurence Boone wrote in the report. “It is time to refocus fiscal support on productive investment that will boost growth, including investment in education and physical infrastructure.”

For Canada, though, the solution must go beyond a refocusing of public spending over the next few years. It needs to include incentives to light a fire under business investment that was, frankly, a problem long before the pandemic came along. Crisis policies may have merely encouraged a long-standing tendency in our private sector to favour investments in labour over capital.

In the five years prior to the pandemic, total employment in this country rose 8 per cent. Over the same period, non-residential business investment, excluding inflation, fell 15 per cent.

Mr. Perrault suggested that the optimistic investment outlook in the Bank of Canada’s business survey masks the bigger picture: that Canada remains an underperformer relative to our global peers, even in this recovery.

“Canadian investment is probably going to rise less than a lot of our competitors this year; investment is rising everywhere,” he said. “The temptation is going to be to say things are improving … [but] if our relative investment continues to decline, then our competitiveness hurts, our productivity hurts.”

In a report this week, National Bank of Canada chief economist Stéfane Marion noted the country’s private non-residential capital stock – basically, all the physical structures, machinery and equipment owned by the private sector – actually declined last year, for the first time on record. While the pandemic was undoubtedly a contributing factor, growth has been generally trending downward for more than a decade.

“Whatever the cause of this lack of private investment, we must turn it around,” Mr. Marion said.

“Canada, as a small, open economy … must do a better job of growing its capital stock to take advantage of a highly successful immigration policy, and harness the productive power of a growing work force of highly skilled people.”

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Toronto market rally fizzles on hawkish central banks



Canada’s main stock index ended higher on Wednesday but gave back almost all of its earlier gain as investors weighed hawkish signals from the Bank of Canada and the U.S. Federal Reserve.

The Toronto Stock Exchange’s S&P/TSX composite index edged up 4.91 points, or 0.02%, to 20,595.89 but that closing level was 1.6% below its intraday high.

“The story of the day has been the huge intraday swings around the Bank of Canada and, more importantly for the U.S. markets, around the Fed,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.

The Bank of Canada said it will soon start hiking interest rates from record lows to combat inflation, while the Federal Reserve signaled it is likely to hike in March.

“Anybody that was holding out that maybe they’ll delay, it’s pretty clear they’re not going to delay,” Cieszynski said.

Tightening monetary policy typically hurts riskier assets, such as equities.

Major U.S. benchmark index the S&P 500 ended lower, taking an abrupt nosedive that reversed earlier solid gains.

On the Toronto market, heavily weighted financials rose 0.4%, while the energy sector ended 0.3% higher as oil prices climbed.

U.S. crude oil futures settled 2% higher at $87.35 a barrel as rising political tensions between Russia and Ukraine added to concerns about further disruption in an already tight oil market.

Weighing on the TSX was the materials group, which includes precious and base metals miners and fertilizer companies. It lost 1.2% as the Fed’s hawkish stance pressured gold.


(Reporting by Fergal Smith; Additional reporting by Ambar Warrick; Editing by Sandra Maler)

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Will rate hikes dampen Canada's already lacklustre business investment? – Financial Post



Slow and clear transition to higher interest rates could avoid a negative shock

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With interest rates set to rise, perhaps as soon as March, it’s fair to ask what that could mean for Canada’s lacklustre commitment to business investment, now that loans are about to become more expensive.


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The Bank of Canada held the overnight interest rate at the lower bound of a quarter per cent in its decision on Wednesday, but telegraphed an end to its commitment to low policy rates until the middle quarters of 2022.

Company spending on machinery, software and non-residential property, like factories, was less than 10 per cent of Canada’s $2-trillion gross domestic product (GDP) in the third quarter, down from 13 per cent in 2014, when oil prices collapsed, a shock from which the oilpatch still hasn’t recovered.

The pandemic hasn’t helped, as business investment has continued to shrink amid all the uncertainty created by the global recession that followed COVID lockdowns in 2020, and the worryingly fast inflation that has come with the recovery.


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So as central banks in Canada, the United States, and elsewhere move to tame price pressures by raising borrowing costs, there’s a risk that higher interest rates could dampen investment intentions. But economists said that Bank of Canada Governor Tiff Macklem probably can avoid a negative shock to business sentiment by communicating clearly and ratcheting up borrowing costs slowly.

“Business investment is going to recover somewhat and that’s not really a brave call,” Pedro Antunes, chief economist at the Conference Board of Canada, said in an interview. “It’s just that we’re at such low levels, it’s bound to recover.”

Business investment is going to recover somewhat and that’s not really a brave call

Pedro Antunes

Until the first quarter of 2014, business investment in the U.S. and Canada was roughly the same in terms of its share of GDP. Since then, the story has been dramatically different. The capital expenditure of U.S. companies was nearly 15 per cent of economic output in the third quarter last year, suggesting the U.S. economy has become more competitive during the pandemic.


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A lack of investment, historically, has translated into slower labour productivity growth, with Canada posting annual gains of one per cent on average from 2000 to 2019, whereas the U.S. saw growth of 1.7 per cent.

Even if Macklem opts to tap the brakes, a series of interest-rate increases probably wouldn’t discourage businesses, given they are sitting on mountains of cash, said Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce.

Firms have accumulated more than $130 billion in excess cash since the start of the pandemic, and are likely holding off spending it until executives have a clearer vision of the road ahead. A straightforward message from the central bank about how it intends to confront inflation could boost confidence over the near term, Tal said.


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“It’s really the message from the Bank of Canada that they are not behind the curve (which) can help businesses down the road by improving confidence,” he said. “If you are a CEO, you’re taking a very conservative approach towards spending money in this environment because you don’t know where we will be six months from now.”

The central bank is confident firms will spend on operational upgrades once pandemic-related weaknesses subside, it indicated in its Monetary Policy report published on Jan. 26.

Tiff Macklem, governor of the Bank of Canada.
Tiff Macklem, governor of the Bank of Canada. Photo by David Kawai/Bloomberg

“Outside the oil and gas sector, firms are expected to increase their investment in the face of growing domestic and foreign demand, improved business confidence, limited production capacity and the gradual easing of supply constraints,” policy-makers said in the report.


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The past year has been more chaotic than clear for executives. Companies have had to grapple with a deadly virus, soaring inflation, and supply-chain bottlenecks. Macklem and other central bankers initially said the burst of inflation that came with the recovery would be temporary, and then relented as price pressures continued to build. Canada’s consumer price index surged 4.8 per cent in December from a year earlier, the biggest increase in more than 30 years.

On top of that, immigration stalled because of travel restrictions, exacerbating a labour shortage that produced nearly 900,000 vacancies in 2021 even as overall employment returned to pre-pandemic levels in the fall. There’s hope on the horizon with the Omicron wave seeming to have peaked in some parts of the country, but anxiety still abounds among employers, said Antunes.


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Broad-based investment intentions signalled in the latest Business Outlook Survey suggest the tides could change coming out of the pandemic, especially as firms look to rebuild inventories eaten up by hot demand and supply-chain clogs.

  1. Canada added 886,000 positions in 2021, a record and a faster return to normal than in the United States.

    Canada’s U.S.-beating jobs recovery might not be as great as it looks

  2. 'Without immigration, we would be going backwards,' says CIBC World Markets' Benjamin Tal.

    Immigration surge could slow Bank of Canada rate hikes

  3. Tiff Macklem, governor of the Bank of Canada, during a news conference in Ottawa on Dec. 15, 2021.

    Debt-strapped Canadians brace for risky rate-hike cycle

  4. Bank of Canada Governor Tiff Macklem.

    Bank of Canada holds interest rate at 0.25%

It’s also possible that investment isn’t as sluggish as headline numbers suggest.

COVID-19 has quickened the pace of technology adoption, especially among professional service industries, which tend to deploy less capital per worker. Some of those positives might not be fully captured in data, especially among technology companies, which focus their business investment on people and research and development, said Martin Toner, director of institutional research at ATB Capital Markets Inc.


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“That’s where the vast majority of capital being raised by startups goes. It mostly goes into people and research because this is all intellectual property,” Toner said.

The state of the labour market could be giving businesses another reason to invest. All those unfilled positions could put upward pressure on wages, lowering the trade-off between buying productivity-enhancing equipment and hiring more workers.

“Corporations will not sit and do nothing,” said Tal. “Now labour is expensive, unavailable. People will switch to investing in capital.”

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Crypto money laundering rises 30% in 2021 -Chainalysis



Cybercriminals laundered $8.6 billion in cryptocurrencies last year, up 30% from 2020, according to a report from blockchain analysis firm Chainalysis released on Wednesday.

Overall, cybercriminals have laundered more than $33 billion worth of crypto since 2017, Chainalysis estimated, with most of the total over time moving to centralized exchanges.

The firm said the sharp rise in money laundering activity in 2021 was not surprising, given the significant growth of both legitimate and illegal crypto activity last year.

Money laundering refers to that process of disguising the origin of illegally obtained money by transferring it to legitimate businesses.

About 17% of the $8.6 billion laundered went to decentralized finance applications, Chainalysis said, referring to the sector which facilitates crypto-denominated financial transactions outside of traditional banks.

That was up from 2% in 2020.

Mining pools, high-risk exchanges, and mixers also saw substantial increases in value received from illicit addresses, the report said. Mixers typically combine potentially identifiable or tainted cryptocurrency funds with others, so as to conceal the trail to the fund’s original source.

Wallet addresses associated with theft sent just under half of their stolen funds, or more than $750 million worth of crypto in total, to decentralized finance platforms, according to the Chainalysis report.

Chainalysis also clarified that the $8.6 billion laundered last year represents funds derived from crypto-native crime such as darknet market sales or ransomware attacks in which profits are in crypto instead of fiat currencies.

“It’s more difficult to measure how much fiat currency derived from off-line crime — traditional drug trafficking, for example — is converted into cryptocurrency to be laundered,” Chainalysis said in the report.

“However, we know anecdotally this is happening.”


(Reporting by Gertrude Chavez-Dreyfuss; Editing by Himani Sarkar)

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