Why we need more pubs: Interest rate levels are in the hands of entrepreneurial dreamers

Dated: January 29 2019

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Why we need more pubs: Interest rate levels are in the hands of entrepreneurial dreamers

Ten per cent of firms will account for about 70 per cent of investment by companies with fewer than 500 employees: BDC survey

Apparently this millennium's Canadian entrepreneurship peaked more than 10 years ago, according to some indicators.Getty Images

Did you hear the one about the Australian, the Irish, and the Canadian who go to a bar?

They get to drinking and the next thing they know they have started a company! Haha! Who would start a company right now? So 2007, which is when Canadian entrepreneurship in the current millennium peaked, according to some indicators.

But about a year ago, Rory O’Sullivan, an Australian, and Ruairi Hanafin, a transplant from Ireland, got it in their heads that they could build a grain-and-coffee trading platform based on blockchain technology. They pulled in a third colleague at Canada Pension Plan Investment Board, Peter Vincent, a native of Ottawa, and the three of them decided to go for it.

“I was speaking with Ruairi at a pub in Toronto and we thought, `Well, you know, we have the means to start a company,’ and it was perfect timing,” O’Sullivan told me on a call from Toronto with the other founders of Grain Discovery. “Blockchain technology was emerging, and obviously the supply chain was going to be an earlier adopter of that,” he continued. Farmers are adopting tech at “warp speed,” but “the simple process of buying and selling grain, it’s glacial,” O’Sullivan said.  

Stephen Poloz, the Bank of Canada governor, was counting on dreamers like O’Sullivan, Hanafin and Vincent to get over the trauma of the financial crisis in 2008-09 and the collapse of oil prices in 2014-15.

As economic growth surged in 2017, many on Bay Street urged the governor to raise interest rates. Poloz told them to be patient. He suspected the economic cycle was entering a sweet spot at which animal spirits would overwhelm fear, driving creditors to lend, executives to invest and entrepreneurs to start new companies. Their efforts could add productive capacity that would enable the economy to grow faster without causing rapid price increases.

“The economy is expanding inflation-free farther than what many people thought when it began,” Poloz said in October 2017. “If you nipped it in the bud, wouldn’t you regret it afterwards?”

The economy is expanding inflation-free farther than what many people thought when it began. If you nipped it in the bud, wouldn’t you regret it afterwards?

Bank of Canada governor Stephen Poloz, in 2017

Canada’s central bankers were clear earlier this month about the main variables that will determine the path of interest rates this year: oil prices, the housing market and Donald Trump’s trade wars. A fourth determinant will be the extent to which the country’s productive capacity has grown since 2015, when we narrowly avoided a recession. Policy makers will update their estimate of Canada’s non-inflationary growth rate in April. It’s difficult to guess how that assessment will go.

“We’ve had a modest amount” of capacity building, Poloz said at a press conference in Ottawa on Jan. 9. Last year was an “off year,” as uncertainty over North American trade negotiations “really slowed down that investment story,” Poloz added. “So I’m hopeful that as we get into this year, that that [process] can resume.”

The Bank of Canada currently estimates that the economy’s non-inflationary speed limit is about 1.9 per cent, which is a few tenths of a percentage point faster than a few years ago. Economic growth has been moving faster than that for a couple of years, which is why policymakers have raised interest rates five times since July 2017.

Most analysts see fewer interest-rate increases in 2019 than they did six months ago because the global economy slowed significantly over the second half of last year. Inflation no longer is a major concern for most forecasters. Some even are talking about a recession.

A darker outlook doesn’t necessarily mean investment will stop. The Bank of Canada’s latest quarterly economic report predicts strong investment outside of the oil industry because non-energy companies report that they are struggling to keep up with orders.

Business Development Bank of Canada’s annual survey of investment intentions of smaller companies offers a less definitive forecast. About three-quarters of respondents feel good about the economy, yet investment spending likely will remain little changed, according to Pierre Cléroux, the Crown lender’s chief economist. That wouldn’t be terrible, since business spending would plateau at a high level, he said.  

A lot of companies aren't investing much. This is not good news.

Pierre Cléroux, chief economist, BDC

Still, the survey suggests that only 43 per cent of smaller companies plan to buy technology that would help them keep pace in the digital economy and offset the labour shortages that a majority say are keeping them from expanding. Ten per cent of firms will account for about 70 per cent of all investment by companies with fewer than 500 employees, according to the survey. “A lot of companies aren’t investing much,” Cléroux told me in an interview on Jan. 21. “This is not good news.”

Entrepreneurship data also are mixed. The population of companies grew 0.7 per cent in the third quarter from the same period a year earlier, the slowest growth in more than a year, Statistics Canada reported this month. The “entry rate” — which StatCan calculates by dividing the number of new firms by the average of the total in the current and previous quarter — slowed for the second consecutive quarter. The new rate of 12.6 per cent was decent by recent standards, but considerably slower than the pre-crisis pace of about 15 per cent recorded in the first half of 2007.

There are reasons for that. A labour shortage in most parts of the country means talented people don’t need to create jobs for themselves. And the population is getting older, implying a smaller pool of risk-takers, since retirement is around the corner.

So to a certain extent, the level of interest rates will be determined how many other O’Sullivans, Hanafins, and Vincents are out there. All three had great jobs at one of the world’s leading institutional investors. But they were a little bored. “We’re experts at our jobs,” O’Sullivan sad. “We’re not three kids in our moms’ garages. We thought, let’s give this a real crack.”

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Steven Axford

Steve Axford grew up in Victoria, BC and has always been active in his community. Steve is a Victoria Cougars Hockey Team alumni as well as a Victoria Shamrocks (intermediate) alumni. During his time....

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