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Episode 49

A leader in developed growth

Published on: October 15, 2020 • Duration: 22 minutes

This week Roger Hirst talks to John Stackhouse from RBC about the longer-term investment prospects for Canada, where a number of structural tailwinds are lining up that could see its growth story leave other developed markets trailing in its wake. The population growth potential is on a par with some of the most energetic demographic trends within emerging markets, whilst the country’s vast size and resource base would be supportive of a rapid rise in its inhabitants.

  • In previous Big Conversations, we've often taken a look at the prospects of specific countries such as Japan, Hong Kong and India. In this episode, I'm going to talk with John Stackhouse about the outlook for Canada. A huge resource rich country with a relatively small population. John was previously editor in chief at Canada's national newspaper, The Globe and Mail, but now works in one of Canada's largest financial institutions. Good morning, John, could you please give us a little bit about what you're doing now? 

    Good morning. I work in the office of the CEO at RBC Royal Bank of Canada, which is Canada's largest bank and one of the largest in the world, helping the organization understand macro trends. So I have oversight of our economics department as well as our policy research team. And we're really tasked to understand the big forces at play in the economy and society as they affect a bank, but more critically our clients. 

    John, I wanted to kick off with, what are the key drivers of the Canadian economy, in particular the demographics, which I think are very unusual by the standards of most developed economies. 

    Canada's economy, like many Western economies, is really fueled by consumers. And the consumer side of the economy is powered by population growth, productivity and debt. And we're seeing interesting trends on all three fronts disrupted, obviously, like almost everything by the by the pandemic. One thing that's not well understood about Canada, especially outside the country, is the power of population growth through immigration. A clear pattern has been established over a quarter century. It's been largely depoliticized, it's its policies remained, by and large, consistent through conservative and liberal governments, majority and minority governments. And there's not a lot of provincial opposition to it, although that that rises and and ebbs from time, time to time. But we've been on a pattern of one percent plus population growth for a good number of years, and as I said, that's largely through immigration. The other thing to understand about Canadian immigration is it tends to be and it is increasingly younger and more educated and increasingly driven through post-secondary education. The government, current government, and a lot of policy thinkers believe that this investment in a higher educated workforce, particularly through immigration as well as investments in colleges and universities here will be a critical factor in a productivity lift over the coming years, pandemic dependent, but once the world begins trading again, once we start producing again, especially on the services side of the economy, which is where most of Canada's growth is, that brainpower is going to be the key input for economic productivity. 

    So what sort of population growth are we talking about here? 

    Right now Canada's population is just shy of 40 million. And there's a movement in the country, including a group called the Century Initiative, which has a, what some see as an audacious goal, of increasing that population to one hundred million. So from 40 million to one hundred million by the year twenty one hundred. That may seem like a shocking number to increase two and a half times the population in 80 years. If we are to hit that goal, we will need the same population growth roughly that we had in the decades following World War Two. 

    And what would that be in terms of immigration and which regions are going to see the biggest influx? 

    So immigration policy has been shifting towards this are immigration numbers are roughly three hundred and fifty thousand newcomers a year. When the pandemic is is behind us, that will probably go up to 400,000. There are some who would like it to be five hundred thousand. Again, big numbers and difficult for even some Canadians to digest. We're a big country geographically, very big. There are large parts of the country that are underpopulated. But even our major centers like Toronto, which you may see behind me where I live, have a lot of room to grow both upward, so Toronto pre pandemic had more construction cranes working than any other city in North America, but also room to grow outward. Geographically, Toronto is growing in three directions. Transit is being built at a fairly good clip, and we're likely to see a lot more infrastructure spending in the in the coming years right across the country, but there will be a focus on the big metros, Toronto, Montreal, Vancouver, principally in the sort of hard and soft infrastructure, social infrastructures, schools, daycare and transit that allow for a an actively working mobile population. This often leads to the question about housing, which is one of the great global curiosities about Canada. Are we overbuilt in housing? And again, cycles go up and down. But over the long term, we continue to be underbuilt. We don't have enough housing for the population that is growing here in Toronto. We have something like a hundred thousand plus new households being formed every year. 

    And kind of presumably like the rest of North America, it has an abundance of resources which can support a pretty strong population growth?

    So resources, I'm glad you asked that because it is a critical part of our balance of trade and our balance of payments. Resources, especially high value ones, and particularly oil and gas account for a significant share of the money that we earn globally. So it supports our currency in a very significant way, but also supports government revenue in a very significant way, both at the provincial and federal levels. So much of what we take for granted in this country in terms of health care, transit, education is financed by the sustainable extraction and exporting of those resources, oil and gas, but also lumber or minerals, agriculture and food products. If we are to make the investments that I spoke about in the cities that we have, if we are to support a country of somewhere between 40 and 100 million over the next many decades, we've got to lay a lot more infrastructure that costs money. We will need to sustainably develop those resources and continue to export them and take a reasonable share of the revenue from that through taxation to invest in the future economy of the country. That's a really important part of the Canadian equation, which isn't fully, always fully understood, even here in Canada. 

    Now John, one of the sort of cliches of the Canadian economy is that it's still got a very, very powerful sort of extractive industries sector, mining sector of these still plays a big part in the Canadian economy. 

    They are big and they are valid. It will ebb and flow with commodity prices, obviously. But there are incredibly strong Canadian companies in each of those sectors and an abundant and hungry market within driving distance of us. But we also have better trade access. I would argue that any country in the world, we have a free trade agreement with Europe, which is a significant advantage for Canada as a non European country. We have a number of good trade agreements with Asia and continue to have the opportunity, especially post pandemic, to to build on those, and then most importantly, the US, MTA, the North American Free Trade Agreement 2.0. that gives us preferential access to the great American market as well as Mexico. But that's critical for the export of resources, because while we need to diversify our trade, we sell most of what we produce to the US. The US will continue to grow through the next number of years and may see significant growth coming out of the pandemic. What do Americans do when the economy starts to accelerate? They buy houses and they buy cars, buy lots of other things, but that is pretty clear. Canada produces the lumber that goes into a lot of those houses and we are seeing a significant increase even in the last couple of months in lumber demand. Not enough coming out of Canada. So big opportunity there. We produce a lot of the parts, including the higher value parts that go into American autos as there is a re-shoring of American manufacturing generally, but American auto production, particularly Canada, will have a significant part of that and a significant leg up on other other countries. And we're seeing that here in the pandemic, a fairly good increase in manufacturing activity. 

    So what are the other areas of growth? What are the other up and coming types of industries and sectors that you have within Canada? 

    Significant opportunities that Canadians have created over the last decade in knowledge based sectors, software, life sciences, but increasingly agriculture, technology, ag-tech, education, technology, ed-tech, a lot going on in this country, including in the perimeter of the big cities that I mentioned. Toronto is now one of the world's leading tech hubs, and Toronto extends to the great Waterloo hub of innovation. But you have tech clusters from downtown Toronto to the perimeter of the city that are among the best in the world. Montreal is one of the world's leading A.I. centers now, it has a significant life sciences economy as well. And we would anticipate growth in those areas one day when the global economy starts to lift off again and when there is demand not just for those hard goods that I mentioned, but for the IP, for the for the brainpower products that we think are going to come out of these centers. 

    And are these the sectors that you'd invest in for instance? 

    If I were investing in Canada among a host of opportunities, I would look at ag-tech and agriculture and food production more broadly. We are a major food producer and food exporter to the world. There's a lot going on globally in ag-tech. We've produced a report at RBC, which you can find easily called Farmer 4.0. So just Google, RBC and Farmer 4.0 that looks at the advantage for Canada and the investments we think we need to make. But a lot of international money coming to the country looking for that next generation of agriculture and knowing that the raw material, literally, the land, water, soil is here. So how do we transform that into the next generation of higher value exports? That's a terrific opportunity that covers pretty much every part of food production. A.I number 2 - Toronto and Montreal are among the global centers in A.I a lot just starting to take off in A.I. We we are investing significantly in us as a bank and it's not A. I for A.I sake. Look for extensions of A.I, whether it's into financial services, through fintech, whether it is into education, technology, education, through ed-tech, the way students learn is is being revolutionized right now in the pandemic through to mobile based learning, even in the classroom. Thirdly, I would mention life sciences. You also have you get here in Toronto and Montreal, some of the world's best medical institutes doing incredible research and producing a lot of the drugs, as well as processes that will be in demand post pandemic globally. So I would look for opportunities there. 

    Is Canada embracing the ESG initiative? Because obviously with these heavy extractive industries that you've got. Are they having to also toe the line in terms of those ESG directives? 

    We think this is a quiet but significant opportunity for Canada over the coming years. And we at RBC see our obligation in the sector, but also the opportunity for us as a global leader in financial services to be a global leader in ESG financing. So let me start with the oil and gas sector, because that gets a lot of attention in the ESG debate. Many Canadian producers are among the most responsible oil and gas producers in the world, especially when you apply the full E. S and G lens to it, which we keep. And that's what our investors tell us to do. So we keep stressing that to global audiences. You have to talk about the E plus the S plus the G. If you leave the S and the G out of it, you're going to get a backlash like we've seen even before the pandemic from different parts of populations around the world. Canadian producers are among the best in the world at the E plus S plus G. They can be better. They know that. They would say that. And we're going to try to help them to get better. One of the challenges, but also opportunities for investors is to see the emissions delta that is available in those Canadian firms. If you are investing in a Canadian firm that is using some of that capital to invest in globally leading technology at emissions reduction. In the production, refinement and shipping of fossil fuels. Your contribution to the delta of emissions reduction is greater in 2020 than you might find anywhere else. We think this is really important for investors to appreciate. We're not starting from a zero base when we talk about emissions. So how are you helping reduce emissions? We as a financial institution are doing a lot of work with also in a number of global groups on sustainable finance, on taxonomy, on measuring and auditing those sorts of gains from emissions and helping to communicate that to shareholders. We need to understand our own carbon footprint of our balance sheet, of our lending, and have made a number of significant announcements this year not including last week, an announcement to shift away from coal financing to be much more rigorous with our debt and energy development financing, as well as in other sensitive, sensitive regions. So we are upping the bar for ourselves and we'll continue to see that increase in the years ahead. But we think that's a Canadian advantage, that if we can help the world move towards a smarter, more sustainable ESG model of financing, Canada will be better. This is not a tax on us. We think this makes us more efficient as a producer and a consumer nation. 

    But I have to ask this question, but presumably there are also some execution risks that Canada is going to have to negotiate as well? 

    It's a good question and one we should ask ourselves and remind ourselves whenever we can. Our number one risk is internally in ensuring that the confederation remains not just intact, but well functioning. Canada is a confederation of provinces and the federal government from day one. So for more than 150 years have been arguing about the balance of power. That's OK. That's pretty typical in a well functioning democracy. But there are greater tensions today, particularly in Western Canada over the province and the economic balance in the country that needs to be resolved. I'm confident it will be, but it is. It is a risk. So keep an eye on on on that. Secondly, trading relationships. We are a trading country. We need a well functioning global preferably, but certainly a multilateral approach to open and fair trade. We as a middle power benefit from that. Every move away from that towards more protectionism is a challenge. And then thirdly, as part of that is the restructuring of supply chains globally. Could be an advantage for Canada, but were not big enough to produce everything we need. Nor should we aspire to do that. We benefit from integrated supply chains as a producer and end as consumers. And we have to be mindful of breakages and supply chains and what that does to our competitiveness and to our cost of living. 

    Is there a risk of a brain drain where the cream chase the opportunities over the border in the USA, for instance? 

    Well, we're going to we're seeing an interesting transition, partly because of the pandemic, although it preceded the pandemic, where a lot of people, the cream that you talked up, the best and the brightest are coming here for a variety of reasons, including lifestyle, including political, the political climate. People tend not to move here for the weather, but they do move here for the open society, for a place where you can raise your kids regardless of religion, skin color, belief or way of life. And especially in our large cities, which is where most immigrants tend to settle, defined as accommodating a culture. I would argue, as I've certainly seen anywhere in the world, that is part of the tradeoff analysis that any person goes through versus taxes and income levels. It might be more advantageous, might be in in other in other places. But what Canadians are also starting to appreciate and I've just written a book about this called Planet Canada, is the opportunity for us to continue to export people to the world. So when you think back to some of the macro issues that we were talking about at the beginning, how we produce resources, but how we also produce IP for the world, how do we export that to the world? Well, one of the channels that we need to take advantage of is that, what I call the 11th province of Canadians, those two million to three million Canadians out there, very active economically, socially and even politically in different parts of the world. Another competitive advantage for Canada coming out of the pandemic. 

    So, John, despite the issues around the pandemic, it sounds like the growth outlook for Canada is actually pretty healthy at the moment? 

    So as we look into the twenty twenties post pandemic, Canada is better positioned than almost any other country in the world. Very well educated, well functioning country with access to the world's best markets. The world wants to come here and they want to come here for good reasons. It's a great place to live, to work, to start businesses challenging incredibly right now, a long term. That's why there's a line up at our doors. So while the rest of the world is struggling with lots of existential questions about how international community should function, Canada's getting on with it. So post-pandemic, but even through the pandemic, one of the best places in the world to be. 

    It feels like Canada is in a unique position when compared to many other developed market economies. Its population could increase by two and a half times over the next eight years, where many of its peer group are expected to see their populations contract. And in many cases, dramatically so, like Japan. And it has the space to accommodate this growth. Canada is the world's second largest country by landmass, and yet its population size only just ranks inside the top 40. Obviously, the living conditions across much of the region would be considered extreme, but the country is blessed with a wealth of resources. So if you combine this resource dividend and population growth with strong institutions and a strong presence in the new technology and services sectors, then Canada may be one of the better investment opportunities across the developed markets. 

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