With Economic Rebound in Sight, Canada Should Shift Focus to Healing Investment Scars

(OTTAWA) – The Canadian Chamber of Commerce’s Chief Economist and Senior Vice President, Policy, Dr. Trevin Stratton, issued the following statement regarding today’s Monetary Policy Report and interest rate announcement:

“There is a big difference between an initial rebound and a true recovery, and today’s economic outlook from the Bank of Canada marked the line in the sand as the middle of 2022. This is when economic slack will be absorbed and Canada might be looking at an increase in interest rates.

Today’s Monetary Policy Report states that after a strong consumption-led recovery in 2021, growth is projected to ease over 2022 and 2023 and become ‘self-sustaining.’ This creates two challenges for policy makers. First, how to avoid growth easing back to our mediocre pre-pandemic levels. And, second, how public investment can best provide value for money in terms of growth if it is already projected to be self-sustaining.

The key factor will be focusing on Canada’s flagging investment levels. Recessions lead to declining investment spending and the pandemic downturn is no different. Our leading growth drivers this year are projected to be consumption, housing, and government spending, in that order, with business fixed investment bringing up the rear. Given Canada’s disappointing investment levels prior to pandemic, we cannot go back to the status quo ante after our initial economic rebound. Less capital investment today means lower levels of economic production in the future. 

What remains uncertain is our ability to engineer longer-term growth and recovery. Even mild recessions can lead to long-lasting damage to the situations of individuals and businesses, as well as economic fundamentals more broadly. This is known as economic scarring. The consequences of high unemployment, falling incomes, and reduced economic activity can have lingering effects even after an initial rebound that can last for years.

This week’s federal budget addressed some economic scars, such as the focus on lasting effects in the labour market. However, it will also be important that we address any long-term investment scars. To do so, our growth drivers will need to shift from public spending to private investment to propel recovery and help get our finances under control. According to today’s economic outlook, our business investment is projected to remain relatively flat during recovery, contributing 0.5 percentage points to growth this year and 0.7 percentage points in 2022 and 2023.

The exceptionally high growth rates we will see when the pandemic subsides later this year will be something for all of us to celebrate, but we should also be concerned about forward looking business investment levels. While economies often see rapid growth during an initial rebound as unused capacity is returned to work, the drag due to the long-term damage can still prevent the recovery from reaching its full potential. The economic impact on investment will linger long after we are able to put the pandemic itself in the rear view mirror. Canada’s recovery plan should focus on healing these investment wounds so our pandemic scars don’t limit our future prosperity.”