A phone discussion with a reporter this week on trends in Canadian investment and capital formation piqued my curiosity as to what the long-term trends in Canadian gross fixed capital formation have been. Apparently, despite the global financial crisis and associated economic uncertainty, business investment and capital formation is still relatively strong at the moment in Canada (though Statistics Canada did report yesterday that business plant and equipment fell third quarter after six quarterly increases). This recent growth is a function of a number of factors including low interest rates, resource development investment in the oil sands and mining sector, and residential, retail and office construction in the larger urban centres of the country. The question was raised during my discussion as to how this current boom or upsurge compared to past booms. So, naturally, I decided to go to the data and see what insights I could get.
Of course, data availability to put together a consistent series is an important concern but I was able to put together three separate though related data sources. For the period 1870 to 1926, there is the national accounts data put together by Mac Urquhart at Queen’s which provides GNP estimates for Canada as well as an estimate of gross fixed capital formation. For the period 1926 to 1960 there is Historical Statistics of Canada (also reliant on Mac Urquhart), which provides GNP and an estimate of gross fixed capital formation. Finally, for the period 1961 to 2010, I was able to get annual series from Statistics Canada for GDP and gross fixed capital formation. Note that the estimate of gross fixed capital formation is for both business and government.
As the measure of investment activity I have calculated the ratio of gross fixed capital formation to output (GNP/GDP) for Canada for the period 1870 to 2010. The share of GDP going to capital formation is but one indicator of investment activity but it seems like a reasonable one to use. Investment spending is a volatile component of national output and certainly more variable than national output so fluctuations in the ratio should reflect fluctuations in investment rather than GDP changing faster than investment. The mean growth rate of nominal GNP/GDP from 1870 to 2010 was 6.4 percent and the standard deviation 7.8, whereas the mean for nominal gross fixed capital formation was 0.9 percent and the standard deviation 11.0.
The accompanying Figure I plots the investment-output ratio and it shows the most spectacular investment boom in Canadian history was the period from 1896 to 1912 when the investment-output ratio rises from 0.115 to reach a peak of 0.341. This was of course the wheat boom/western settlement period that saw massive capital infrastructure put in place for the western wheat economy. The ratio collapses during the First World War and recovers during the 1920s but modestly before collapsing during the Great Depression to a low of 0.096 in 1934. There is a slight recovery but then the ratio drops during the Second World War to the lowest it has ever been at 0.081. The period 1944 to 1957 sees a steadily rising investment-output ratio –the post-war boom era - and since the 1950s the ratio, while fluctuating, has never since dropped to the depths of the 1930s or the late nineteenth century. No doubt, interventionist government economic policy did much to stabilize fluctuations in the investment-output ratio and the economy in general in the period since World War II.
However, the investment-output ratio has never since reached the height achieved during the post-war boom – the post-war peak of 0.259 achieved in 1957. Indeed, the long-term trend since 1957 seems to be a declining investment output ratio despite the period of increase since the late-1990s. I’ve highlighted this in a separate graph with a linear trend (Figure II) for the 1960 to 2010 period. Is the long-term slide in economic growth and productivity since the 1970s simply rooted in the decline in gross fixed capital formation’s share of GDP? Have we simply been investing less in Canada’s economy? Maybe a giant national infrastructure program is what is needed.