Canada's Wake-Up Call

(Disclaimer: These are all my personal views)

As investors, we spend a lot of time appreciating the vision of management and how they hope to shape their company and impact society indirectly through their entrepreneurship. In Canada our great success story is Shopify, founded by Tobi Lutke. He also happens to be an avid social media poster and to put it mildly Tobi is concerned about the direction of our economy and especially the prospects of technological innovation as we enter the AI era. In all honesty, I’m surprised these posts from last month were largely forgotten when they first were released. It should be a bigger deal that a successful Canadian tech entrepreneur running a $100 billion company is sounding this pessimistic. Lets explore this further and have a deeper conversation about the challenges Canada is facing today and how we can build a more constructive vision for the future.

Our Challenges Today:

Our Expanding Public & Private Employment Divide: We are seeing the expansion of a gap between hours worked in the private sector and the public sector. To put it mildly there is a boom in public sector employment and hours worked even as private payrolls are dipping into negative territory. Given we are talking about a monthly change a small gap in the data compounds quickly over a year or two. The widening gap is a cause for long term concern because by design the public sector is shifting economic resources from one area to another, placing a greater burden on private companies to generate the economic wealth to distribute in the first place. This is an indirect tax on productivity with the downstream effects being felt years into the future. We just had a strong payrolls report but this isn’t about spot metrics but a general trend over multiple years.

Our Youngest Generation Falling Behind: Looking through the research the trend that surprised me most is the accelerating weakness especially amongst the youngest Canadians who are just entering the job market. The employment rate for Canadians between the ages of 15-24 is trending lower at a accelerated rate and is now below the 55+ group that has seen a structural drop due to early retirements post Covid. The soft underlying economic trends are being felt most acutely by the youngest most aspirational demographic of the employment pool. The importance of this headwind cannot be understated. Breaking into the job market is one of the most meaningful milestones for anyone in their life, we cannot let this part of the social contract in society be broken.

Our Real Estate Obsession: Its not an exaggeration to say that Canadians are obsessed with real estate. You’re probably thinking “Hot take Dan, what’s next, the sky is blue?” but hang in there. The key point to emphasize is not just the impact on consumer balance sheets or the crowding out of entrepreneurship by real estate speculation, the under-reported story is the employment side. The Canadian financial services sector which heavily services real estate has ballooned to record highs especially after Covid-19. Private sector employees who work in Construction & Financial Services, Insurance, Real Estate (aka F.I.R.E) comprise over 20% of private payrolls, a widening gap with the US. Even as the private sector is struggling to grow in the face of a ballooning public sector we are seeing private payrolls expanding in the most economically sensitive areas. This leaves Canadian employment vulnerable to the swoons of our housing market as any real estate market shock is not just a wealth effect headwind but also an employment income one.?

The most unnerving part of sharing this analysis is we are looking at the data during a strong global economic backdrop. In a recessionary scenario the current structural issues Canada is wrestling with are going to get significantly worse. I remain hopeful that we talk about these sources of economic vulnerability early and honestly before a recession raises the temperature and fosters an environment for stop-gap short-term solutions that fail to tackle the core issues.

Our Future Opportunities:

Tapping Our Resource Abundance: Canada is uniquely positioned as a resource superpower in the western hemisphere. Our reserves across a wide cross-section of mission critical commodities spans, oil, natural gas, nickel, copper, uranium, potash, farmland, timber, fisheries, hydro power generation and so much more. We can and should be the “Saudi Arabia” of not just oil but a broad base of commodities that modern nations need to build next generation technologies and manufacturing. There are no EV’s without nickel and no low cost power sources for data centers without abundant uranium supply. We have it all with strong governance and environmental regulations to ensure their sustainability.

Leveraging Our Trade Agreements: Canada is positioned geographically right next to the largest economy and the wealthiest consumer base in the world. Even better than proximity there is a long-standing trading relationship that has been re-enforced and enshrined through the NAFTA I & II agreements that enable a free trade zone that is the largest in the world. This is a principal advantage Canada enjoys along with Mexico, there is no friendlier partner with the US than Canada. Accessing the US market across different industries is critical in achieving global scale as successful Canadian companies that have expanded to the US are scaling a pool of demand that is over 10x greater without the economic protectionism that usually limits geographic expansion. Shopify is a perfect example of this scaling advantage, Canada is only 6% of their revenue while the US is 66%. Despite this disparity Shopify has 6,000 employees in Canada and 8,900 employees in the US. That’s a pretty good deal for Canada in my view.

Retaining Our People: Every year Canada is losing a sliver of its population to the US and acutely so in the highest paying most technologically advanced industries as students earning degrees in Canadas and looking for a better opportunity down south. To put a finer point on the issue we are losing a staggering two thirds of our computer engineering and computer science graduates to the US. To put it bluntly if you are in the IT industry or healthcare industry the choice is obvious. This data can also be seen through the prism of NATFA TN visas which are roughly similar despite the US having a population nearly 10x our own. The skilled worker balances at roughly 30,000 - 40,000 Canadians in the US and roughly 43,000 Americans in Canada, a roughly equal number largely due to the relative lack of high skill employment opportunities here in Canada. We cannot deepen or raise the quality of our employment pool if we don’t encourage entrepreneurs to create cutting edge businesses right here at home. Tobi at Shopify chose to keep the company based in Canada when Silicon Valley was a natural destination for their venture. We need so many more stories like this to foster an ecosystem that works to create cutting edge jobs and grows the economic pie for everyone to share.

Canada walks onto the global stage endowed with advantages that are the envy of the world. We are a slumbering superpower. It’s a long journey to get there but we need to get serious about taking the first steps. Tobi is right to point out our structural fragility today, but we don’t need to make that tomorrows reality.

Sincerely,

A Passionate Canadian Citizen

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