Spending drop threatens to parch economy

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The pace of business investment is suddenly stalling as some of Canada's biggest spenders pull back, dashing hopes in an area that was supposed to be an economic driver.

Some of the heaviest hitters, such as miners and construction companies, are more reluctant to spend, while others, including retailers and, surprisingly, manufacturers, are forging ahead.

According to an Statistics Canada survey released Wednesday, private and public sector spending on construction, machinery and equipment is projected to rise just 1.7 per cent this year, the smallest gain since the recession.

Private investment will barely budge, with growth of just 0.8 per cent, according to the survey, a far cry from last year's actual pace of 7.8 per cent.

Along with exports, business investment was seen as a key source of economic growth this year as domestic drivers, such as household spending and real estate, peter out. Instead, the closely watched survey offers a mixed picture of business confidence in Canada.

The broad softness in private sector capital spending plans "doesn't bode well for 2013 growth, especially given hopes the sector would be a key contributor," said Benjamin Reitzes, senior economist at BMO Nesbitt Burns.

Weakness in mining and oil and gas depresses the overall numbers because those sectors make up about 20 per cent of capital spending in Canada, he said. Housing, also sluggish, makes up about 25 per cent.

There were "pockets of strength" outside those groups, in areas such as retail and finance, Mr. Reitzes said, but they won't be enough to generate much of a rise in capital spending in 2013. While the Bank of Canada has been pinning its hopes for a strengthening economy on beefed-up spending, "those hopes may be misplaced at this point."

Mining is at the root of much of the slowdown. In that sector, spending plans tumbled 20.3 per cent from last year, while the oil and gas sector is projecting a small gain of 0.8 per cent.

The mining sector's capital spending plans are depressed because of the decline in commodity prices, and the subsequent drop in interest among investors to put money into the industry, said Steve Letwin, chief executive officer of gold mining firm Iamgold Corp.

"People are pulling back big time," he said of capital spending.

"Nobody is going to the market to raise funds for drilling or expansion, because their share prices are so low."

Fortunately, companies like Iamgold are capable of cutting capital spending quickly at mine sites when necessary, Mr. Letwin said. "We're not forced or compelled to do anything other than maintenance, so we can stop things fairly quickly."

Still, because the mining sector is highly cyclical and commodity prices will come back eventually, capital spending will inevitably rise again, he said.

Jim Evaskevich, CEO of junior oil and gas exploration firm Yangarra Resources Ltd., described his company's capital spending plans as "somewhat restrained."

Because of increasing concerns over the price differential – the lower price Canadian oil fetches compared with world prices – "it seems like a good time to be cautious" about spending, Mr. Evaskevich said. "The key is to keep our balance sheet in good shape."

Manufacturers, particularly in Ontario, utilities and transportation plan to boost spending. Public investments are set to grow 5 per cent. And retailers are also ramping up, with spending plans climbing 12 per cent as competition heats up with the arrival of large U.S. chains such as Target Corp.

"While all those service industries don't invest a lot, the fact they are raising investment across the board is a good sign that they are confident demand for their industries will grow," said Philip Cross, research co-ordinator at the Macdonald-Laurier Institute.

In the U.S., meanwhile, business investment activity appears to be picking up after a years-long lull. Capital goods orders excluding aircraft, a proxy for business spending plans, jumped 6.3 per cent in January, the Commerce Department said Wednesday -- the biggest gain in a year.