Is Canadian business confidence on shaky ground?

The Ontario economy grew 2.6% on average between 2000 and 2007, reveals an economic report from the Ontario Chamber of Commerce (OCC). Although that level of growth might sound good in today’s global environment, it’s cause for concern.

That’s because wealth from the production of goods and services dropped 12% in that time period, reveals the report. And, since the 2008 financial crisis, production has fallen another 12%. In fact, much business prosperity today comes from the financial activities of asset and liability management, not from business activity.

Read: More Canadian earnings to watch

The root of the problem is an economic environment of increasing costs for production, regulation and housing; this has resulted in weak market and labour force activity. Ontario businesses operate in a risk-averse environment in which they’re disinclined to grow production by investing or hiring, says the report.

While 43% of OCC members expect to increase revenue in the next 12 months, 35% expect revenue to stay the same, and 19% expect revenue to decrease. In particular, businesses are challenged to find qualified workers and to pay rising electricity costs.

To change the province’s course, the OCC says it will prioritize workforce development and energy sector initiatives, as well as focus on infrastructure and healthcare.

Such priorities echo those released Monday in a report by the federal government’s economic advisory council in an effort to boost Canadian growth.

Read: Canada must focus on jobs and trade, says growth council

Potential new headwind: U.S. corporate tax

A new problem may be on the horizon that could further shake business confidence in Canada.

A potential headwind for Canadian businesses is proposed U.S. tax reform, which could delay capital spending decisions. Under the proposed reform, U.S. companies would pay a 20% corporate tax on imported goods and services.

“Canadian companies exporting to the U.S., having already paid Canadian corporate income tax on their export profits, would in effect be hit again as a U.S. corporate tax would be paid by firms or consumers buying their products,” explains Avery Shenfeld, chief economist at CIBC World Market, in an economic report.

With one-fifth of Canadian GDP linked to U.S.-bound exports, the effect would be significant.

Read: The link between GM’s recent layoffs and NAFTA

The tax proposal is reminiscent of the Smoot-Hawley Tariff enacted in 1930, which saw world trade come to a halt as other countries — led by Canada — lashed back with a tariff on U.S. exporters. The halt was a factor in a deepening Great Depression, says Shenfeld.

“We’re assuming that Trump will avoid the same fate,” he says, adding that the U.S. president has called the new proposal “too complicated.”

About the OCC report: The OCC’s report includes the results of the OCC’s new business confidence survey conducted in partnership with Fresh Intelligence, a business prosperity index developed by the Canadian Centre for Economic Analysis (CANCEA) and an economic outlook for 2017 prepared by Central 1 Credit Union.

Read the full report here.

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