Skip to main content

The Bank of Canada estimates the energy sector has cut its investment by 40 per cent this year, and predicts another 20 per cent decline for 2016.

Hasan Jamali/THE CANADIAN PRESS

Businesses are cutting their spending on equipment, buildings and even software as the bruising inflicted on the oil sector discourages companies from hauling out their wallets to upgrade operations.

Despite a solid showing in third-quarter GDP numbers released Tuesday, there is an underlying malaise in business spending that is likely to continue and could have consequences down the road. GDP data showed that spending on fixed assets such as land, buildings, machinery, equipment, vehicles, furnishings and intellectual property fell at a 3-per-cent annualized rate in the third quarter, the third straight quarterly slide.

While Statistics Canada doesn't break out quarterly business investment data by industry, there's little doubt that the deep plunge in income generated in the oil patch has been the major cause of the decline. The Bank of Canada has estimated that the energy sector has slashed its investment by 40 per cent this year, and the budget cutting isn't over: It predicts another 20 per cent decline for 2016.

Story continues below advertisement

Jayson Myers, president of Canadian Manufacturers & Exporters, said the main reason for the investment downturn is the weakness in the resource sector. With returns on invested capital falling as a result of low prices, companies are not going to buy more equipment, he said.

That has affected a huge number of companies in the oil and gas sector, and those that supply products to it – such as pipe, machinery and equipment makers. "Oil sands alone accounts for close to $70-billion of procurement every year, and out of that probably $45-billion is in manufactured products," Mr. Myers said. "That is a huge footprint."

A weak western economy means consumer demand has slowed, hurting companies that supply the domestic economy even beyond the oil patch, he said.

Some sectors are doing reasonably well, particularly if they are exporting to the United States and are not energy-related, Mr. Myers said. In the auto sector, for example, demand and production is fairly strong, so some companies in the supply chain are still investing actively.

Peng-Sang Cau, president of Kingston-based automation equipment manufacturer Transformix Engineering Inc., said she believes the depressed oil patch in Alberta is the main cause of the weaknesses in investment in equipment and machinery in Canada.

"As a nation, we are still too dependent on our natural resources sector," she said. When the sector is booming, many firms do well supplying it, but "now that sector is going through major downturn, it has cascading effects … it is like throwing a huge rock into our Canadian economy and you see the ripple effects."

Transformix exports its assembly machines, and they go to a diverse range of businesses. Its only client in the oil sector "has told us there is no new investment in the upcoming year but we are not seeing the same issues in other markets," Ms. Cau said.

Story continues below advertisement

David MacDonald, CEO of Toronto-based information technology and services company Softchoice Corp., said he too believes the spending downturn is mainly confined to the resource sector. "We're seeing good investment from everybody but the oil patch and the resource-based industries."

Softchoice's business in Calgary has been affected, "but in Ontario we feel quite good about service-based industries and some of the manufacturing companies that are starting to benefit from the reduction in the value of the Canadian dollar."

Still, there is some evidence that spending has been constrained outside of the energy sector, too – held back by a combination of a sluggish economy that has trimmed business profits and an exchange rate that has raised the costs of investing in foreign-made machinery and equipment.

Last week, Statistics Canada reported that corporate operating profits were down 5.4 per cent in the third quarter from the second quarter, and were down 10 per cent from a year earlier. Economists added that the Canadian and global economies still have excess capacity in the wake of the Great Recession – leaving reduced need for new investment.

A shift in the Canadian and global economies away from traditional manufacturing may also be contributing to the sluggish investment environment.

The slowdown not only subtracts from private-sector contribution to economic activity now, but it has a longer-term effect, because businesses aren't adding to the economy's productive capacity, said National Bank of Canada senior economist Krishen Rangasamy. "The ability of our economy to grow has been curtailed by a lack of investment."

Story continues below advertisement

The hope is that with the U.S. economy gaining strength, U.S. demand for Canadian goods will eat up the excess production capacity and spark a resurgence in business investment.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies