If we were counting (as some key policy makers have been) on Canadian businesses to fuel the economy by boosting their capital investment, we can stop counting. They have little appetite in their 2014 budgets to step up their spending; indeed, they now look to be waiting for the economy to make the first move.
Statistics Canada's annual survey of capital-investment intentions, released Wednesday, indicated that public and private organizations plan to increase spending on construction, machinery and equipment by a thin 1.4 per cent in 2014 – even less than last year's meagre 1.5 per cent, and the slowest growth since the recession.
Certainly some of the blame lies with government austerity, as finance ministers across the country wrestle their budgets toward balance: Public investment is expected to rise 1.9 per cent this year, down from last year's 6.6-per-cent growth. But the survey shows that Canadian private-sector companies plan to increase capital spending by a modest 1.3 per cent this year, after a puny 0.2-per-cent increase last year.
It's a bad omen for economic growth. The Bank of Canada has said, repeatedly, that it expects rebounds in business investment and exports to be catalysts in Canada's healthier economic trajectory. Exports have shown signs of coming around (up a solid 0.9 per cent in December, including a 1.2-per-cent gain to the U.S.), and the combination of a weaker Canadian dollar and an accelerating U.S. recovery should help on that front this year. But business investment looks stuck in neutral. And governments are stepping out of the game before companies are ready to step back in.
Given that Canadian companies are sitting, collectively, on an estimated $600-billion in cash, the obvious question is, what's holding them back?
Certainly the decline in the Canadian dollar has taken away a major motivation that helped spur investment earlier in the economic recovery. The high dollar made it significantly less expensive for Canadian companies to import machinery and equipment to upgrade their operations, and it would appear that many took advantage: Private-sector capital spending rose by an average of 10 per cent annually from 2010 through 2012, pushing it above pre-recession levels and well ahead of the pace of U.S. business investment.
But with that currency advantage evaporating last year and into this year, businesses are now looking at the more fundamental question of whether they will soon need new production capacity any time soon. A lot of that spending earlier this decade was predicated on the notion that an economy operating at full capacity was just around the corner; those hopes have been dashed so often that businesses have justifiably lost their faith.
Four years ago (in 2010), the Bank of Canada was talking about the Canadian economy returning to full capacity in the second half of 2011. We're still waiting. The central bank has pushed back the time frame repeatedly, as the recovery has stumbled and excess capacity has persisted. The bank's latest outlook, in last month's monetary policy report, now doesn't see the output gap closing until early 2016. It's been like chasing a rainbow.
For Canadian companies, the rainbow chasing is over. Now they look determined to wait for the economy to catch up to their capacity – for the Bank of Canada's output gap to show serious signs of closing – before they ramp up investment in their buildings and equipment.
That will require a serious increase in demand – perhaps, as Bank of Canada Governor Stephen Poloz has suggested, an acceleration in exports that will strain businesses' capacity and prompt them to invest in expansion. But it looks like Canada's companies are going to want to see the proof before they pull out their wallets again.