In this article I hope to illustrate three key problems with the Canadian economy that have evolved over the past decade, and the conundrum they present Canadian investors.
Per capita business investment
Over the past decade there has been a dramatic divergence between Canadian and U.S. business investment. Prior to 2015, both countries followed similar trajectories. Two major events occurring in 2015 influenced a divergence to this day. Firstly, our largest industry suffered significant price reductions, with oil declining from the $120-$140 range to the $60-80 range, and natural gas dropping from the $4-$6 range to the $2-$4 range. When our largest industry suffers a major setback, it will naturally lead to capital expenditure cutbacks. The energy industry is accustomed to these kinds of cycles. However, complicating this cycle was a very different and hostile attitude by a newly elected federal government.
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One of the first moves of the new government was implementing a tanker ban off the West Coast, cancelling the approved Northern Gateway pipeline project and evaporating $373 million Enbridge had already spent on the project. The government followed very quickly with the Impact Assessment Act, dubbed the “No More Pipelines” bill. Shortly afterward, Energy East was cancelled. While energy was the industry targeted, I would argue that these moves affected all business investment considerations as Canada developed a business-unfriendly reputation.
Concurrently there was a rise of “incentive” use to attract businesses the government deemed desirable, often with dubious business prospects. Just one example was the massive government incentives used to attract three battery plants. Northvolt has already declared bankruptcy, and I would suggest both the Stellantis and Volkswagen projects were on shaky grounds even before the tariff issue. I have never invested in any of the auto companies because the entire industry perpetually suffers from low levels of profitability. This begs the question: why are we constantly throwing obstacles at profitable business and throwing money at unprofitable ones?
Back to the main story: Enbridge shares have yet to eclipse their 2015 levels. While there is a current wave of Canadian patriotism, as a shareholder in Enbridge and other large pipeline corporations, I do not want to see them exposing shareholder money to the vagaries of our regulatory system. Until the Impact Assessment Act is revoked or significantly altered it will be hard to get any company to take the risk on a major energy infrastructure project. Politicians may be stating we now need east-west movement of energy, but it is unlikely to happen with private money. We needed east-west movement a decade ago, too. While the need is even more urgent today, the legislation is performing as designed and preventing development.
At the time, the third major project was Kinder Morgan’s TMX. Upon becoming apparent the project could not be completed with the new regulatory structure, Kinder found a buyer in our Canadian government. Having just killed both Northern Gateway and Energy East, I believe our government felt some obligation to have this remaining project completed. I bought (and still hold) shares of Kinder Morgan shortly afterward, as it demonstrated deft unloading of a project it was going to abandon for $4.7 billion. The shares have performed well, while taxpayers completed the project for four to five times the original estimated cost.
The bottom line is that since 2015, per capita business investment has fallen by about 25 per cent in Canada, while it has followed its normal historic trajectory and risen by about 30 per cent in the U.S.
Per-capita GDP
Reduced capital expenditure reduces competitiveness and leads to lower worker productivity and declining per-capita GDP. Once again, both countries followed a similar trajectory until 2015 when a significant divergence began to occur. Declining for the past three years, Canada’s per-capita GDP is now almost exactly the same as it was in 2015, while that of the U.S. has grown at its normal rate and is about 20 per cent above 2015 levels. Per-capita GDP is synonymous with standard of living. It is uncanny how tightly linked business investment is with GDP output.
It’s not just in comparison to the U.S. that Canada falls flat. In fact, the U.S. was only a little above the OECD (Organization for Economic Co-operation and Development) average. Data from 39 OECD countries shows Canada in 38th position, with only tiny Luxembourg behind us. That is an incredulous level of failure in a stable country blessed with phenomenal natural and human resources.
Growing public sector employment, at expense of private sector and entrepreneurship
Compounding these factors is that a less efficient public sector workforce is growing much faster than the private sector, and entrepreneurship has left the building…I mean, the country. Since 2015 the civil servant workforce has grown by almost 30 per cent, twice the rate of private sector employment, while entrepreneurship has flatlined. Self-employment started declining before the pandemic, accelerating during and after the shutdowns. This is very disconcerting, as successful small startups morph into medium-sized and them large businesses and have represented an important driver of our economy.
These three factors paint a frightening economic picture of Canada. It is in this weakened state we must now battle a country once considered a safe economic, trading and military partner.
How is this impacting my investment decisions? In the Jan. 28 issue I mentioned tilting back toward Canada from both a currency and a valuation standpoint. While things have changed, I continue to have some faith, albeit waning, there will be a significant policy shift by our governments at all three levels. If that doesn’t manifest soon, I will be re-evaluating this position. As the saying goes, “It is always darkest before the dawn.”
Even though I am still tilting back to Canada, it is important to understand our market is largely financials, energy and mining, with a smattering of smaller tech companies and industrials. It is impossible to build a diversified portfolio exclusively on Canadian stocks and I will continue to hold significant U.S. holdings.
My 2025 predictions expressed caution toward the market and at time of writing, that caution appears warranted. We could be in for a bumpy ride.
