Investment Survey Signals Continued Weakness in Capital Spending

May 11, 2016
Jock Finlayson

Statistics Canada’s just released capital expenditure survey confirms that the negative fall-out from sluggish energy and materials markets continues to take a toll on business investment across the country.

According to the new survey, overall public and private sector capital spending in Canada is poised to decrease by 4.4% in 2016, relative to last year. This marks the second consecutive decline in total investment spending. The drop is much steeper in the private sector, with planned investment plunging by 9.3% in 2016. This will be partially offset by a 6.5% boost in public sector capital outlays.

The downturn in investment is concentrated in the mining, quarrying and oil and gas extraction sector, where capital spending is projected to plummet by 23% this year, on the heels of an earlier 31% drop between 2014 and 2015. Manufacturing investment is also expected to take a hit, down almost 11% this year. In part, dwindling capital spending in the Canadian manufacturing sector reflects the knock-on effects of ongoing dramatic cuts in oil and gas-related investment, which have dampened demand in the energy sector for steel, machinery and other manufactured inputs. A few Canadian industries should see higher capital spending this year, including retail trade, utilities, education, and transportation and warehousing.

Capital Spending Intentions by Region

Source: Statistics Canada; BMO Financial Group.

The investment slump extends to British Columbia, notwithstanding this province’s seemingly robust macro-economy. Planned investment in BC will be 3.7% lower this year than in 2015, a figure that pales when juxtaposed to projected declines of 17.7% and 11.9% in Saskatchewan and Alberta, respectively. Capital spending is on track to pick up in Quebec and Manitoba and will remain flat in Ontario in 2016.

In BC, private sector investment is particularly soft in the mining, oil and gas and manufacturing sectors, according to the Statistics Canada survey.

Business non-residential investment has been weak in Canada for a few years now. Adjusted for inflation, business non-residential construction investment fell in both 2014 and 2015. And it will be in negative territory again in 2016, before staging a modest recovery next year. At the same time, real business investment in machinery and equipment eked out a meagre 1% gain in 2014 before slipping by 1.3% last year. This year, real business investment in machinery and equipment is likely to decline by around 7%, before turning positive in 2017.[1]

Policy-makers in Ottawa and the provinces need to pay close attention to what’s happening to business capital spending. Several years of sagging investment suggest that Canada’s potential economic growth rate is diminishing due to the failure to re-build, expand and modernize the country’s capital stock at a sufficient pace. In Canada today, too much investment arguably is being directed to housing-related construction, and not enough to develop and acquire the productive capital and technology assets that are necessary to assure future prosperity and a globally competitive economy.

[1] Forecasts from BMO Capital Markets, Canadian Economic Outlook, May 6, 2016.

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