The business investment that has been critical to Canada’s economy is slowing as consumers spend less and exports weaken, threatening to hold back overall growth.
The slower pace of spending on machinery and equipment is likely to persist, and may spread to the energy and mining sectors, traditionally responsible for much of the investment, economists say.
As much as 40 per cent of the economic bounce since 2009 has been due to capital expenditures on machinery and equipment, but over the past four quarters, that spending grew at just 3 per cent, its slowest rate since the recession, said Peter Buchanan and Emanuella Enenajor of CIBC World Markets.
“Unfortunately, the roar of booming business investment has sounded more like a whimper in recent quarters, contributing a mere fraction to GDP of what it did earlier in the recovery,” they said in a report Monday.
This also poses problems for Bank of Canada forecasts.
“We think that the pace of growth in business capital spending this year and next is likely to be sub 5 per cent,” Ms. Enenajor added in an interview. “Which is much weaker than the [central] bank’s call for roughly 7 per cent or so growth in the coming year, so that’s going to potentially knock a few ticks of their [2.1-per-cent] GDP call next year.”
Disappointing growth will push aside any arguments for the central bank to raise its overnight rate from the current 1 per cent, Ms. Enenajor said, especially when the latest data show export levels are 4.3-per-cent lower than they were in May, 2011, and that growth in consumer spending slowed to 0.2 per cent in the first quarter, compared with 0.7 per cent late last year.
Economists believe gross domestic product expanded an annualized 2 per cent in the second quarter, slightly higher than the 1.8 per cent projected by the Bank of Canada. A clearer picture will emerge Tuesday when Statistics Canada releases May’s monthly GDP figure.
In its Monetary Policy Report on July 18, the Bank of Canada continued to forecast solid growth in business investment, citing the strong financial position of Canadian businesses, good credit conditions, and a strong dollar. The bank also said heightened competition would provide impetus for investment.
But despite debt-to-equity ratios of less than 54 per cent, a near-record low for many Canadian companies, Ms. Enenajor and Mr. Buchanan said poor corporate results are still likely to deter investment, with many TSX-listed companies missing earnings targets in recent weeks.
“Firms are only likely to match positive talk on outlays with action if there’s money to be made from rising revenues,” they wrote in their report.
Some of those companies reporting lower profits are same ones traditionally at the forefront of capital investment, such as those in oil and gas, and mining. Oil producer Cenovus Energy, for example, reported a 40-per-cent drop in profit last week, citing lower prices for oil and gas.