A country on the way to falling behind in competitiveness and slowly eroding living standards
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Canadian economy is not focusing enough on investment, a deficiency that is putting the country on a path to falling behind in competitiveness and experiencing a slow erosion of living standards, according to a new report by law firm Bennett Jones LLP.
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The report, released June 12, concludes that greater domestic competition would stimulate stronger investment and allow Canadian firms to “win” globally, key goals in an era of high interest rates, “sticky” inflation and growing fragmentation in supply chains and trade.
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“Protected markets and poor incentives for investment in Canada will do the opposite,” the report warns.
The authors say Canada should look at improving “framework” policies in areas such as competition, regulation and taxation, and focus on changes that would encourage innovation and investment and reinvestment of retained earnings by companies.
At the same time, increasing the share of GDP linked to investment should be achieved through targeted measures to ensure Canada’s foothold in emerging critical industries, including digital and clean technologies and technologies such as electric vehicles. Such a strategy would both accelerate productivity growth and ensure Canada’s global competitiveness on the path to a clean economy, the report said.
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“Poor investment in Canada not only robs our economy of opportunities to grow, it means our companies lag behind their global counterparts in their ability to conquer global markets and miss out on the enormous opportunities our trade agreements with major economies make possible,” it said.
The authors acknowledged that there are problems with the path they are pushing, calling tax reform a “dangerous political exercise at the best of times.” But the report urges governments to consult and work with businesses while responding to global forces and challenging vested interests and policies that stifle competition and breed complacency.
“Rules and tax structures need to be adapted to a world that is rapidly expanding the potential and applications of digitization, where a growing share of economic value is generated by intangible assets,” the report said, adding that some initiatives are already underway and should be “pursued with vigor and a sense of urgency.” . The list includes a review of competition policy, modernization of privacy and data governance legislation and steps to accelerate digitization in the financial services industry.
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The report’s authors, members of the government affairs and public policy group at Bennett Jones, said that increasing the share of national income devoted to investment would reduce the share available for current consumption but provide the basis for long-term prosperity.
While this shift is critical for the future, the report acknowledged that Canada’s short-term priority must be to return to a path of non-inflationary growth.
“Increases in key central bank interest rates have helped ease demand and rates need to stay high for longer. Inflation will not quickly return to the target“, the report states. “As a result, global growth will be weak in 2023, recover later in 2024, and only have roughly medium-term potential with low inflation in 2025.”
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Even after inflation is back close to the two percent target, the report said there was reason to expect interest rates to remain higher than they were before the COVID pandemic and that growth potential would be lower. The authors note that while US and European authorities acted quickly to resolve failing banks in March 2023, financial stress remains due to record levels of public and private debt. In addition, an intensification of the war in Ukraine or rising tensions over Taiwan could push up commodity prices, dampen confidence and unsettle capital markets.
The authors noted that the IMF’s global growth projection for the next five years is the lowest since 1990. Globally, there are risks of a recession and “disorderly adjustment”, while inflation may prove “sticky” and prolong the return to non-inflationary growth. after 2025.
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The report indicated that Canadian interest rates appear to be near a peak of 4.75 percent and could likely be gradually reduced in 2024 and 2025. This could translate into real GDP growth of around one percent, rising to an annual average growth rate of 2.5 percent by the end of 2025. But uncertainty remains.
“This scenario has risks,” the report warns. “If global developments cause new stress or if inflation is firmer than expected, a recession could occur, but more likely a prolonged period of low growth and adjustment.”
• By e-mail: bshecter@postmedia.com | Twitter: BatPost
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