Fewer executives predicted faster sales growth, investment plans remained “cautious,” and there is “substantial” slack in the labor market, the Bank of Canada said Monday in its second-quarter Business Outlook Survey. “Modest domestic demand ...
(Adrian Wyld/The Canadian Press)
WhenÂ the Bank of Canada released its latest survey of business managers on Monday, it confirmed what weâ€™ve known for some timeÂ nowâ€”companies in Canada are a panickedÂ bunch. The Business Outlook Survey, conducted each quarter, found that business leaders view the next year with apprehension, particularly those with ties to the energy sector.
â€œModest domestic demand, uncertainty and insufficient foreign demand are key factors holding back investment intentions,â€ the Bank observed, while noting the cautious outlook wasnâ€™t limited toÂ the oil patch.Â â€œWhile firms judge that the boost to their sales from U.S. growth is lending support to their investment plans, investment intentions are modest for exporters, even those unaffected by commodity prices.
This chart from the Bankâ€™s survey shows how weak the outlook for the next year is. It measures the percentage of companies that plan to increase their investment spendingÂ minusÂ the percentage of companies that expect to pull back on spending.
This latest update on investment intentionsÂ doesnâ€™t bode well for Canadaâ€™s economy. Business investment, which is crucial to supporting growth, has been in retreat for the last five quarters,Â and before that was stuck in neutral going back to 2012.
Hereâ€™s some context for how badÂ things are right now.Â The following chart comparesÂ business fixed capital investmentâ€”money thatâ€™s put into things such as plants and machineryâ€”in the wake of the last three recessions. (not including the two-quarter downturnÂ which occurred in 2015, since the C.D. Howe Instituteâ€™s Business Cycle Council has not acknowledged that as an official recession). As the chartÂ shows, this isÂ theÂ weakest business investment recovery since at least the earlyÂ 1980s, which is as far back as Statistics Canada keeps comparable public data.
What sets this post-2008 cycle apart from the previous two is how robustÂ the initial rebound was. For that, Canada could thank theÂ sharp resurgence in oil prices that followed the 2008 crash as well as the boom in residential homeÂ construction. But that early surge fizzled out, andÂ real (inflation-adjusted) business investment now back to where it was prior to the recession.
It would be easy to pin the blameÂ for theÂ slump squarely onÂ the oil patch, which hasÂ scaled back plans for big oil sands projects following the oil price crash that started in mid-2014. But this is also a story of non-energy companies being refusing to put their money to work.Â In a recent briefing report the Conference Board of Canada found that many non-energy industriesâ€”particularly manufacturing sectors like theÂ transportation equipment, wood products, food,Â primary metal and paper industriesâ€”are already bumping up againstÂ capacity limits. Yet businesses in those sectors have been reluctant to invest and create more room to expand.Â As the Conference Board said in a statement: â€œThe continued lack of investment has the potential to severely limit Canadaâ€™sÂ future growth.â€
Canada is hardly alone in this struggle. The recovery in business fixed-capital investment in the U.S.Â after the Great Recession is also seriously lagging earlierÂ post-recession periods. When the U.S. Federal Reserve chose to hold rates in June, it specifically called out weak business investment in that country by way of explanation.
Yet there is no simple explanation for why this is happening. Itâ€™s not as if itâ€™s expensive to borrow and invest, what with interest rates in both countries at near all-time lows. And as has been pointed out, theÂ oil crash hammeredÂ energy companies, but cheap oil and the low dollar (in Canada at least) should have spurred non-energy exporters to take advantage of those ideal conditions.
Ultimately, it comes down to confidenceâ€”or the lack thereof. Business donâ€™t have faith that investments they make in new capacity today will provide enough of a return to justify the risks. They simply donâ€™t believeÂ domestic or international economies are on the mend, and the shock delivered by Britainâ€™s decision to exit the European Union may onlyÂ deepen their uncertainty. It could be some time before they get their nerve back.
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