Canadian businesses that fail to take advantage of the current economic climate to invest in themselves face a bleak future, says TD Economics in a new report.

In the report released Monday, TD says that while the strengthening economic recovery will naturally bring solid earnings growth, “this positive cyclical backdrop belies a deep structural problem in the Canadian economy — namely the nation’s abysmal productivity performance.”

TD reports that labour productivity has been responsible for roughly 75% of all income growth per person over the past 60 years. Yet from 2000 to 2009, labour productivity growth dropped “to a shockingly low” 0.7%. “This truly dismal performance means that Canada has gone from the fifth most efficient economy in the industrialized world in 1970 to 15th position in 2009. It also led to Canada dropping from the fifth highest income per person to the 10th slot over the last two decades.”

Absent productivity improvements, Canada’s long-term economic outlook is likely to dim. Without any increase in output per hour worked, Canada’s aging population will only support a trend economic growth rate of close to 1.3% in the years ahead, it says.

Moreover, it warns, “foreign competition is intensifying at a furious pace”; both in the US where payrolls were slashed and business investment has accompanied the recovery, and in emerging market economies, such as China and India.

“The traditional Canadian response to increased competition by developing nations has been to gradually move up the value added production chain. However, a new era of global competition is emerging and developing nations are rapidly moving into more sophisticated manufacturing,” it observes. “The bottom line is that Canadian firms must innovate or perish.”

The firm says that it will examine explanations for Canada’s depressing productivity performance in a forthcoming report. The current report focuses on weak business investment, which it says is a “major contributing factor” to Canada’s poor productivity.

In the years leading up to the recession, “We should have seen a dramatic business investment boom,” the report notes. Instead, “What actually occurred in terms of investment in machinery and equipment was simply unimpressive.”

“The data suggest that firms were not being innovative and did not take advantage of the favourable environment,” it says, adding that this must change.

“The good news is that an extremely favourable environment for business investment and innovation is upon us once again,” it says, pointing to lower corporate income tax rates, the elimination of capital taxes, the harmonization of sales taxes in some provinces, low interest rates strong earnings growth, a robust dollar and a healthy financial system. “The question is whether businesses will respond this time around or whether yet another opportunity will be lost?”

“In the final analysis businesses must step up to the plate. The economic and policy environment is right. The time to invest in new innovative and productivity enhancing technology is now to meet the competitive pressures of the future and address the looming challenge from demographics. Moreover, increased investment and innovation would not only be in the interests of businesses — it would also materially benefit workers and governments,” it concludes.

IE