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A worker loads pieces of steel into a furance at Standen's Ltd. in Calgary.Chris Bolin/The Globe and Mail

One sore spot sticks out in Canada's rapidly healing economy: Business investment is still tepid.

Business spending typically lags in a recovery as companies wait to see if a rebound is sustainable before ramping up again.

But as virtually every other segment of the economy perks up, from housing to employment, business investment remains one of the softest spots. And it stands in stark contrast to the United States, where businesses are busily boosting capital spending.

In Canada, the lack of investment suggests some companies have excess capacity that still needs to be sopped up, while others remain wary about the sustainability of the recovery.

"What's disappointing is that the U.S. has had small gains in business investment in the last two quarters, but we've had nothing. In fact we've had a slight decline over that period. We haven't seen any contribution from business investment yet," said Philip Cross, Statistics Canada's chief economic analyst. "It's usually the last sector that turns up - but it's notable that that hasn't started to turn up yet."

Caution in the natural resources sector in particular may explain why, he added.

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The lag in spending is troubling on a number of levels. Business investment mirrors the degree of confidence companies have about the future. On this front, they appear still tentative. More importantly, a lack of investment in new technologies and productivity-enhancing equipment bodes ill for the Canadian economy in the long run.

"This investment is essential if we're going to boost productivity and make the innovative changes in products and processes that companies need to grow," said Jayson Myers, chief executive officer of Canadian Manufacturers & Exporters. "It's essential in generating business growth in the future, improving productivity and competitiveness. That's what sustains the economic performance over a long period of time."

Business investment in plants and equipment, excluding the residential sector, was little changed in an otherwise blistering first quarter that saw the economy expand at an annualized rate of 6.1 per cent, Statistics Canada said Monday, rising just 0.2 per cent.

Of that, spending on machinery and equipment rose 1.8 per cent - but remains 23 per cent below its peak of two years ago, Statistics Canada said Monday. Spending in non-residential structures - such as factories, mines or roads -- tumbled 1.4 per cent, the sixth successive quarterly contraction. In that category, both building and engineering investment continued to dwindle, extending a drop that began in 2008.

Recent stock market and currency volatility stemming from Europe's debt crisis doesn't help inspire confidence. Mr. Myers outlines other factors holding businesses back: orders are still patchy in many sectors; many manufacturers are reducing, rather than expanding, warehouse space to cut overhead; most will look first to use up capacity in existing space first; and cash flow has still not returned to pre-recession levels.


In the U.S., business investment jumped 3.1 per cent in the first quarter. That pickup is already benefiting some Canadian companies. Rob Hattin, president of Edson Packaging Machinery, has witnessed a surge in capital investment by U.S. packaging companies.

"These are large packaging companies and they're making huge investment in their production facilities," said Mr. Hattin, whose Hamilton-based company designs and manufactures packaging machinery for consumer goods companies.

Another shift he's seeing: some customers are taking advantage of the weak euro to buy European technology and equipment.

Business investment amounted to about $155-billion in the first quarter. Canada's gross domestic product was $1.3-trillion.

"It's clearly the lagging indicator for GDP, but we should start to see positive growth in the coming quarters" as the recovery solidifies, said National Bank Financial economist Yanick Desnoyers.

With files from Bertrand Marotte in Montreal.

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