Despite central bank interest rates flirting with zero, a low Canadian dollar helping exports, rebounding commodity prices and a resurgent American economy, Canadian business investment remains weak, says the Bank of Canada (BoC).
The Canadian economy performed slightly better than expected in 2016’s fourth quarter. There have also been some healthy employment gains, led by British Columbia, and tentative signs of global economic recovery.
Even so, Canadian businesses remain cautious, and that caution is reflected in business investment that badly trails the U.S., BoC Deputy Governor Lawrence Schembri told the Greater Vancouver Board of Trade (GVBOT) last week.
“While investment in the energy sector appears to be stabilizing, after a painful adjustment to the decline in oil and other commodity prices that began in 2014, overall business investment remains weak,” Schembri said.
Investment spending by Canadian businesses shrank 15% in 2016’s fourth quarter and by 8% overall for that year.
Although business investment typically represents just 12% of Canada’s overall GDP, the central bank considers it an important barometer. Canada’s economy suffered two major shocks over the past decade: the 2008-09 financial crisis and global recession followed by an oil price plunge in 2014 that had a devastating impact on the economies of Alberta, Saskatchewan and Newfoundland.
Between those two major shocks, a prolonged bear market for metals and minerals dramatically reduced Canada’s mining and exploration sector spending.
By mid-2014, Canadian investments had picked up, growing 15% above the pre-recession period, Schembri said. But leading up to 2014, high oil prices resulted in a high Canadian dollar, which put competitive pressures on Canadian exports. Following a price plunge that saw oil drop to US$35 from US$100 per barrel, investments in the Canadian oil and gas sector fell by nearly 50%. Consequently, investment in Canada overall has declined by more than 20% since the middle of 2014, Schembri said.
Global demographics might also be slowing investment growth. Schembri said an aging population in advanced economies has stalled labour force growth. The BoC expects 2016’s 1.4% GDP growth to increase to 2% in 2017 and 2018, “with the expansion of the service sector underpinning rising employment, household incomes and consumption.”
The services sector in Canada continues to expand. But it doesn’t stimulate the kind of spending that manufacturing and natural resource sectors do.
“Thus, the ongoing expansion of the service sector means we may see a shift from traditional forms of investments in structures, such as factories and heavy machinery, toward investment in intellectual property, such as software and research and development, as well as in human capital,” Schembri said. •
