Even with COVID receding, economic decision-making not getting any easier

OTTAWA—For three years now, the economic guessing game around COVID-19 has dominated policymaking in many capitals. As Bank of Canada Governor Tiff Macklem has said, governments knew how to turn off the economy to try to slow the spread of the virus, but trying to figure out how to restart it properly is another matter. As far I know, no one predicted that the supply chain tangles arising from COVID—when coupled with a burst of post-lockdown demand—would produce the worst outbreak of inflation in advanced economies like Canada, the United States, and the United Kingdom in many years. To this day, the pace and nature of the post-COVID bounce-back remains impossible to predict. As Finance Minister Chrystia Freeland pointed out in the Nov. 3 fall economic statement (FES), the Canadian economy has experienced a solid recovery as the virus has eased, recording impressive growth in the first half of this year of 3.2 per cent on an annual basis. At the same time, the FES noted that business activity is slowing internationally, with a risk of a global recession. This is the result of central banks’ anti-inflationary tightening of financial conditions and the energy crisis in Europe arising from Russia’s invasion of Ukraine. Freeland is citing economists’ predictions of a weak economic performance (0.7 per cent) in Canada in 2023. Forecasting has been all over the map during the once-in-a-century health calamity since 2020, and it remains to be seen if the slowdown in this country will be that pronounced. Employment increased by 108,000 in Canada in October, far surpassing expectations and signalling that economic growth will likely remain on the upside in the last three months of 2022. The Bank of Canada is pushing up borrowing costs rapidly in hopes of slowing the worst jump in Canadians’ cost of living in four decades. But it’s impossible to tell how high the Bank’s trendsetting interest rate will have to go to bring inflation down significantly, and how long it might take. As the FES said in reference to the world economy: “It takes time for tighter financial conditions to have their full effect on production, investment, and consumption decisions. As a result, there is uncertainty about how much global growth will slow.” In the short run, Prime Minister Justin Trudeau’s government is, for the most part, facing a lose-lose proposition. The FES allocated funds to help out some of the most hard-hit individuals and families suffering from runaway inflation. But the kind of fiscal measures that would be needed to blunt the impact of the post-COVID price bubble for the majority of Canadians would only add to inflationary pressure. So mostly, the government can only wait it out. As far as longer-term economic conditions are concerned, it is clear the government would like to see the recovery mark a historic turning point for Canada. Trudeau and company envision the Canadian economy seizing this moment to remake itself into a more productive, innovative engine dedicated to securing prosperity by exploiting the post-carbon energy transition of the 21st century. “The green transition calls for an industrial transformation comparable in scale only to the Industrial Revolution itself,” Freeland told MPs, adding that “Canada is blessed with the talented people and the raw materials and the industries needed to drive that transformation.” The potential is indeed there, but landing the business investment needed to help turn the Canadian economy into a more cutting-edge, productive operation is not likely to be easy. A recent Statistics Canada report found that business spending on structures and machinery and equipment has trended lower since oil prices fell sharply in the mid-2010s, and these outlays have been slow to recover from COVID-19. In early 2022, real outlays on non-residential structures and machinery and equipment were four per cent below pre-COVID-19 levels and 22 per cent below peak levels in 2014, the agency said. Also, it said, real spending on research and development was eight per cent below pre-pandemic levels and 11 per cent below levels reported in 2014. Freeland took several new steps last week to address this problem, including enabling the promised $15-billion Canada Growth Fund and recommitting to help innovators through the planned Canadian Innovation and Investment Agency. The government is also putting a tax on corporate share buybacks, an increasingly common practice that some see as economically destructive because it can undermine employee compensation and much-needed investment in productivity-enhancing business development—even when profits are high. As the government is aware, moving to improve business investment in Canada couldn’t be more urgent now that the U.S. has passed the energy transformation bill called the Inflation Reduction Act. The legislation, which some have described as “all carrot, no stick,” includes no carbon tax but increases the competitive attraction of the U.S. market by allocating US$369-billion to support climate action and clean energy—the single largest investment of its kind in history. Les Whittington is a regular columnist for The Hill Times. The Hill Times