WEAK EXPORTS AND BUSINESS INVESTMENT REFLECTS DISENCHANTMENT WITH GOVERNMENT POLICIES.

as exports are struggling to grow at all.

More generally, the continued reliance on household and government spending poses a conundrum for policy-makers. Much of the growth of household and government spending is being fuelled by debt, one reason Canada’s high overall and governments continue to take on more debt, increasing the risks to growth over the long term.

For the moment, the federal government is relying on tighter regulation of lending and not higher interest rates to rein in mortgage borrowing, apparently with some initial success as home sales retreated in January. However, it remains to be seen if a slowdown in housing demand and prices will be sustained and whether less mortgage borrowing will translate into a broader slowdown in total household demand for credit and less government borrowing. Curbing government borrowing seems particularly problematic, given that the federal budget tabled in February called for net borrowing to rise from $23.5 billion in fiscal 2017-18 to $34.8 billion in 2018-19 and stay above $30 billion for the next four years.

Exports should have benefited from the 20 per cent devaluation of the exchange rate since the 2014 oil price crash, but instead exports have stagnated despite a strengthening global economy. While exports of resource-based products recovered, exports of manufactured goods slumped when they are usually the main beneficiaries of a lower dollar. Business investment should have benefited from higher profits earned from exports as the dollar devalued as well as the passing of the worst of the cuts in the oilpatch. Instead, firms project investment will continue to slump for a fourth straight year in 2018. Weakness in investment helps explain the ongoing slump in exports, as firms do not upgrade their competitiveness, or add to their capacity to export.

The continued lethargy in exports and business investment reflects disenchantment with a wide range of government policies perceived as anti-business. These include sharply higher minimum wages in Ontario and Alberta, a nationwide carbon tax, the continued obstruction of new pipeline construction, and new regulations for labour in Ontario and for the federal government’s environmental review process.

The continuing indifference of governments in Canada to the cumulative impact of these policies on business sentiment stands in stark contrast with developments in the United States, where tax reform lowered corporate taxes enough to erase Canada’s long-standing advantage, compounded by accelerated writeoffs of U.S. capital spending and a declining regulatory burden.