John Beck, chief executive of Aecon Group Inc., one of Canada’s biggest construction companies, was asked last month whether he would be chasing new work in the United States.
His answer: If only.
“We don’t have enough capacity to do what is coming at us in Canada,” Beck said at an infrastructure conference in Montreal.
Aecon isn’t the only company that is hitting its limits. Data suggest much of Canada’s economy is maxed out. The latest evidence arrived Friday morning when Statistics Canada reported the unemployment rate was 5.8 per cent in March, matching the lowest in a database that dates to 1976.
I’m unsure that simple description captures the Canadian economy’s extraordinary run of hiring.
Previously, the jobless rate had fallen to 5.8 per cent only once; in October 2007. It now has hit that mark in three of the past four months. The unemployment rate has stayed below 6 per cent for five consecutive months, which is unprecedented; the only comparable streak occurred a decade ago, when the unemployment rate was less than 6 per cent in five of seven months starting in August 2007.
Canada’s labour market rarely has been stronger. That implies we will be running short of employable workers. Patty Hajdu, the federal labour minister, last month called the lack of skilled trades workers “deep and profound.” All of this means employers such as Aecon have decisions to make. They can invest in order to keep up with demand, or they can turn away orders and pass up opportunities to win new markets. The choices they make will determine whether this is as good as it gets, or whether the momentum of the past couple of years leads to a retooling that will allow for faster growth.
In other words, we’re at a stage that will decide whether Canada becomes a dynamic economy or a mediocre one.
Bank of Canada Governor Stephen Poloz is counting on executives to decide to expand.
That’s his rationale for keeping interest rates low, even though he acknowledges the economy likely is near full employment, or the level at which continued hiring will begin to put upward pressure on inflation. By letting the engine run hot, he thinks companies can be persuaded to invest in the labour and equipment necessary to increase production. If enough of them do that, he will have materially improved the economy’s ability to produce non-inflationary growth.
The best evidence of whether the strategy is working comes April 9 with the release of the Bank of Canada’s latest quarterly survey of business intentions, the last major indicator before policy makers announce their next interest-rate decision on April 18. Poloz told an audience last month at Queen’s University in Kingston, Ont. that he was pleased with what Canadian executives had been saying about their spending plans. Still, the central bank has said repeatedly this year that international companies are bypassing Canada and investing in the U.S. as a hedge against President Donald Trump’s capricious use of retaliatory import tariffs. That warning was reinforced in recent days by the leaders of Royal Bank of Canada and Bank of Montreal, with each saying they are watching capital leave Canada in “real time.”
Capital flight is a reason to leave interest rates alone, as lower borrowing costs might offset some of the Trump effect.
But eventually Canada’s tight labour market will put more upward pressure on inflation than policymakers will be able to endure. That might already be happening. Average hourly wages were 3.3 per cent higher in March than a year earlier, so paycheques now have been growing comfortably faster than inflation since the autumn of 2017, according to StatCan’s latest Labour Force Survey.
All things equal, the extra pay will increase demand, unless households choose to save most of that money — a possibility given the extreme levels of household debt. Regardless, Poloz and his lieutenants have said faster wage growth would be a necessary condition for a shift to tighter monetary policy. That condition soon will be met.
It’s less clear what is happening with investment.
There is reason to think the combination of a devastating global recession and a separate collapse in oil prices this decade has severely crippled Canada’s ability to compete. The global economy has been firing on all cylinders for more than a year, and yet the only Canadians who seem to have been able to take advantage are drillers, farmers and miners. A separate StatCan report on April 7 showed the value of exports increased 1.5 per cent in February from a year earlier. That figure flatters the country’s exporters, as the increase is based mostly on higher commodity prices; adjusted for inflation, non-energy exports of goods declined, as they have fairly consistently since 2016 when calculated in those terms, according to research by RBC Capital Markets.
Ottawa and the provincial capitals should be seized by this failure; we call ourselves a trading nation, yet we’re being knocked out of all of our traditional markets by a growing list of rivals.
The Bank of Canada has done what it can, but at a serious cost: record levels of household debt and inflated house prices in the country’s major cities. Nevertheless, Canada’s political leaders mostly have been content to leave management of the economy to the central bank. They should be aware that Poloz is running out of reasons to compensate for the failures with ultra-low borrowing costs.
Gross domestic product is on track to grow at an annual rate of about one per cent in the first quarter, and RBC’s economists predict growth in 2018 of 1.9 per cent, compared with 3 per cent last year.
But even that slower rate is quite a bit stronger than the Bank of Canada estimates the economy can handle without overheating. Before too long, policymakers will have to move to contain inflation. Don’t be angry at them when they do because they only will be doing their jobs. If the economy falters without crutches, it will be because others failed to do theirs.
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