Calling on government to ‘act with urgency’ to drive change

Heeding the call to address productivity challenges, three quarters of Canadian business leaders say their companies now invest as much as – if not more – than their U.S. and global competitors in technology, machinery, equipment and intellectual property, but American tariffs have put a stranglehold on revenue and are cutting off the funds earmarked for continued investment.

In a new survey by KPMG in Canada, most leaders (92 per cent) also acknowledged that they must be bolder and further ramp up their investments in technology and innovation to build a more resilient, prosperous economy. However, six in 10 (59 per cent) say the current economic environment prevents them from investing in the “kind of technologies” that would improve their company’s productivity.

“These results reflect a more ambitious mindset within Canadian business, but they also acutely underscore the difficulties our economy faces right now,” says Benjie Thomas, Chief Executive Officer and Senior Partner, KPMG in Canada. “Tech investment requires a strong bottom line and nine in 10 business leaders say it is essential that governments ‘act with urgency’ and not fall ‘prey to complacency’ in driving tax reform, eliminating interprovincial trade barriers, improving access to capital, and building infrastructure that unites us and opens new markets.”

A 2024 KPMG International survey of global businesses found that large Canadian companies are also outspending their counterparts, but, like the new Canadian survey, many of these investments are still in the early stages and have yet to make up for the extended period when Canadian firms undercapitalized on technology.

"Canadian firms are at a critical junction in their efforts to modernize and boost productivity,” adds Mr. Thomas. “The investments they have made in the last few years are making a difference with 75 per cent saying that their digitization efforts have generated the expected returns and benefits. A further three-quarters found their investments in artificial intelligence boosted their productivity by 10 per cent or more, with over a third saying these investments improved it by over 20 per cent.

“There is a big risk that these investments will be stranded if companies don’t have the capital to continue to invest.”

Key survey findings

• 75 per cent of 250 Canadian business leaders say their company invests the same if not more than their U.S. and global competitors
• 92 per cent agree Canadian companies need to ramp up their investments in technologies or risk falling further behind the U.S.
• 88 per cent say Canadian companies need to be bolder, and not wait around for everyone else to adopt a certain technology
• 59 per cent say they can’t afford to invest in the kind of technologies that would improve their productivity given the current economic environment
• 90 per cent say governments “must act with urgency to ensure Canada remains competitive and prosperous,” adding “it’s essential that our governments don’t fall prey to complacency”
• 75 per cent say their digitization efforts have generated the expected returns and benefits
• 75 per cent say their investments in AI boosted their productivity by 10 per cent or more, with 37 per cent saying these investments improved it by over 20 per cent

What the private sector wants

Given ongoing trade uncertainty, three quarters (76 per cent) of respondents are bracing for the worst and taking steps to prepare for a Canadian recession, the survey finds.

To mitigate the effects of a potential downturn, business leaders laid out their top priorities for the Canadian government:

1. Remove interprovincial trade barriers and harmonize regulations and credentials (64 per cent)
2. Undertake a comprehensive tax review to improve competitiveness (58 per cent)
3. Streamline processes and expedite resource and major infrastructure projects (56 per cent)

Indeed, more than eight in 10 (82 per cent) business leaders believe the elimination of interprovincial trade barriers will improve their company’s efficiency and productivity.

Almost eight in 10 (77 per cent) say that the ‘Buy Canada’ movement has helped boost their sales, and nearly nine in 10 (87 per cent) say it’s prompted their company to look at Canada as a growth market. Eighty-four per cent also “hope the Buy Canada movement doesn’t fizzle out” because they “need it to offset the ongoing trade uncertainty with the U.S.”.

As many as 75 per cent of business leaders no longer view the U.S. as a reliable market and nearly eight in 10 (79 per cent) are diversifying their export markets to reduce U.S. dependency. Over two-thirds (68 per cent) are investing in marketing and establishing relationships in new markets. Even if the trade uncertainty with the U.S. is resolved, 90 per cent of respondents “will still diversify to other markets,” the research shows.

"Pivoting their sales strategies will take time, and two-thirds are already struggling to make long-term plans given the ongoing economic uncertainty,” says Monika Manza, Canadian Managing Partner, Advisory Services for KPMG in Canada. “Businesses need certainty. They are counting on government to take immediate and decisive actions that will allow them to not only manage through the transition but make investment decisions to drive growth.

“They want to tap into the new nationalism and expand their market share across Canada. But that requires the will and leadership of governments across the country to break down artificial barriers to domestic trade. Business leaders want governments to reestablish Canadian tax competitiveness, making the country an attractive place to invest and allow them better access to capital so they can expand and continue to fund technology investments. And they want quick action to get the country building major projects that will take advantage of Canada’s abundance of valuable natural resources.”

Trade uncertainty stunts investments

More than half (54 per cent) say they have “already reduced” their investment, research and development (R&D) spending and/or capital expenditures for the next 12 months as a result of the ongoing U.S.-instigated global trade war. Fifty-seven per cent say they “will reduce” their investment, R&D spend or capital expenditures.

“While it will take time for governments to tackle the priorities most important to the business community, many companies don’t have the luxury of time and are already facing a revenue crunch,” says Ms. Manza. “Already, more than half have cut their profit and sales outlooks, which will make it all the more difficult for them to reinvest in their companies at a time when we need every business to fire on all cylinders and maximize productivity.”

Other survey highlights

The survey findings reveal the impacts on business decisions from ongoing trade and economic uncertainty:

• 66 per cent say it is increasingly difficult to plan for longer term investments
• 54 per cent have “already reduced” their investment, R&D spending and/or capital expenditures for next 12 months
• 57 per cent “will reduce” their investment, R&D spend or capital expenditures
• 54 per cent have lowered their 12-month future profit outlook or guidance
• 58 per cent have lowered their sales outlook for the next 12 months
• 52 per cent have increased prices to customers
• 63 per cent “will increase” prices to customers
• 38 per cent say they have already laid off employees due to trade uncertainty and tariffs
• 49 per cent have imposed a hiring freeze
• 46 per cent are considering laying off employees and/or implementing a hiring freeze.

This survey – KPMG’s third in five months – taps the opinions of 250 business leaders who lead primarily medium- and large-sized companies on their efforts to improve their organization’s productivity and the impediments they face amid economic uncertainty and shifting trade alliances.