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Benjamin Tal, deputy chief economist, CIBC.

If you look at the overall situation in the U.S., capital spending is improving. There is no question about it. But given where cash flow is, which is rising by close to 30% on a year-over-year basis, given the tax cut introduced by Trump, this performance is nothing to write home about.

The point that I’m making here is that there’s something fundamental here. Something is preventing capital investment from rising to levels we have seen in the past, and we’re seeing it definitely in the U.S., and even more so in Canada. The Bank of Canada has been waiting for this big rotation from consumption and housing to investment and exports for years now, and only recently, did the bank say, “You know what? Enough is enough. We are basically not waiting anymore.” So capital investment is not only late, it might not show up at all.

The question is why, because in order to get a very healthy economic recovery, you need a broadly based economic recovery. You need capital investment, and it’s not happening.

Maybe it’s because of the fact that the productivity enhancement that we get is so significant when it comes to technology so you don’t need to invest much in order to get the productivity boost. That’s one possibility, or an excuse.

The other is maybe the opposite. Maybe at the margin, the contribution of innovation to productivity is diminishing, and therefore you don’t get the same boost. It’s possible that the reduction in demand in the global economy because of demographic reasons and the speed limit of the economy slowing down suggests that there is no need for this kind of investment.

Another possibility is that a lot of companies—think Amazon, think Apple—have a huge amount of power, market power […] and many of them are almost a monopoly and they control the market, and therefore they have no incentive or a need to raise capital investment.

All those forces and others suggest that this is not a temporary issue. This is a fundamental structural issue and business investments will not be the pioneer of the cycle. Even in the U.S. now, it’s rising very, very slowly, despite the fact that they got a huge cash injection from Trump and cash flow is rising at a rate we haven’t seen in decades. It’s still not happening, so if it’s not happening now, the question is when it will happen.

In Canada, you have the uncertainty of the possibility that you will not sign NAFTA—that’s an uncertainty. Clearly, the tax cut in the U.S. is negative for Canada. We have a situation in which we pay for carbon. They don’t in the U.S.—another negative. All those forces of uncertainty are impacting the psyche of investment, and the pipeline is clearly impacting the energy sector.

So overall, don’t expect a significant, significant rotation from consumption ousting to investment—another reason why we believe the Bank of Canada will remain relatively subdued when it comes to raising interest rates, despite a strong labour market.

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