Former Bank of Canada governor Stephen Poloz delivers a keynote address to a business conference in Ottawa, on Nov. 24, 2022.Adrian Wyld/The Canadian Press
Former Bank of Canada governor Stephen Poloz says private-sector investment is being crowded out by high levels of government spending and hurt by uncertainty about the future of trade with the United States.
Speaking at an event in Toronto hosted by the Economic Club of Canada, Mr. Poloz noted that federal government spending is now around 2.5 percentage points higher than before the pandemic.
“I’m not here to judge how governments actually spend their money,” Mr. Poloz said.
However, he added, that increase in the baseline for government spending “is not without consequence. So in effect, the private sector is now shrinking by 2.5 percentage points relative to the pie. … And what that will look like, or continue to look like, is low investment rates, low growth of productivity.”
Concerns about weak private-sector investment and lagging productivity are nothing new in Canada. But the issue has become more urgent after six quarters of declining productivity and a growing divergence with the United States.
In a March speech, Bank of Canada senior deputy governor Carolyn Rogers said falling productivity was a “break the glass” emergency.
Mr. Poloz said business investment – a key ingredient for productivity growth – is also being hampered by uncertainty about trade with the United States. This started when former president Donald Trump threatened to pull out of the North American free-trade agreement (NAFTA) in 2015, but it has continued through the administration of Joe Biden.
The United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA in 2018, will be up for renegotiation in 2026. Both Mr. Biden and Mr. Trump have been sounding increasingly protectionist in the lead-up to this year’s U.S. presidential election, putting the future of the USMCA in question.
Mr. Poloz said Canadian companies are investing more in the U.S. and less in Canada because of uncertainty about the future of the trade agreement. If Canadian politicians and policy makers want to reverse this trend, they need to double their efforts to ensure the USMCA remains in place and favourable to Canada.
“We’re getting ready to play good defence, I appreciate that. But I think we should be down knocking on their door,” Mr. Poloz said. ”We could resolve a lot of uncertainty in the business sector by being more aggressively proactive on this.”
Former federal finance minister John Manley, who spoke on a panel with Mr. Poloz, said Canadian politicians and trade representatives need to be touting the benefits of the USMCA not just to the U.S. government, but also to members of Congress and officials at the state and city level.
And they need to think hard about how Canada can remain economically relevant to America, Mr. Manley said. During past trade negotiations, U.S. officials were interested in Canadian oil. But that has become less important as the U.S. has turned into a major oil producer in its own right.
“That has been a transformative change. So what we have to offer them is a lot more nebulous and therefore requires us to be a lot more attentive to what their needs are and how we build those relationships,” he said.