Posthaste: Business spending could contract nearly 10% this year as Canada Inc.’s mood sours
Good morning!
Canadian consumers are slowly normalizing spending and Canadian trade flows are picking up somewhat from their lows, but domestic firms continue to take a grim view of the economy.
Canadian businesses are expected to spend 9.5 per cent lower on capital growth projects compared to last year, according to a new survey by Statistics Canada, in a sign that they, (a) don’t see much bang for their buck at least this year, and (b) are in an acute cash-conservation mode.
Business spending is key to job creation, sources of foreign direct investment and keeps suppliers and other ancillary industries busy — and has a generally strong trickle-down effect on the wider economy.
But Statistics Canada’s Capital and Repair Expenditures Survey, based on a sample poll of 7,000 private and public organizations, shows the outlook seems particularly muted, with Canada Inc. estimated to spend $242.6 billion this year, compared to an earlier estimate of well over $275.5 billion.
While the public sector will step up with spending of $95.8 billion — a 4.2 per cent increase over the previous year —, private sector spending is expected to contract 16.6 per cent to $146.8 billion, according to the poll.
The downturn in spending suggests that the federal and provincial governments may have to do all the heavy lifting and step up infrastructure spending to stimulate the economy at a time when they are also reeling from high deficits.
Not surprisingly, accommodation and food services sector was the most bleak about its prospects and intends to spend 39.2 per cent lower than last year — the biggest decline in spending across the entire economy.
Oil and gas producers, responsible for the second biggest chunk of capex among industries, are also licking their wounds from a catastrophic first half of the year which saw production fall to its lowest level since 2017 in the face of rock-bottom commodity prices.
“Consequently, capital spending in the oil and gas extraction subsector is expected to decrease by 31.7 per cent to $22.7 billion in 2020. The decline is taking place in both conventional (-37.5 per cent to $14.4 billion) and non-conventional (-18.6 per cent to $8.3 billion) oil and gas industries,” Statistics Canada said in a report published earlier this week.
The manufacturing sector also appears to be in no hurry to open its checkbook. As early as February, manufacturers expected a 1.2 per cent increase in capital spending, but now anticipate an 18.5 per cent decrease in capital spending in 2020 (down to $18.1 billion from $22.1 billion) when compared to 2019.
Statistics Canada expects a decrease for both capital construction (-28 per cent) and capital machinery (-14.8 per cent), with chemical manufacturing (-$867 million) and transportation equipment manufacturing (-$774 million) seeing notable declines.
“Out of 21 manufacturing subsectors, 2 reported that they were expecting a minor increase in total capital outlays for 2020,” StatCan said.
Transportation and warehousing, which has emerged as the biggest capex spender this year overtaking oil and gas, will see spending rise 1.6 per cent to $41.2 billion.
Sectors that will see a splurge in spending are the ones that have taken greater importance during the pandemic. The health care sector will see capex jump 3.3 per cent this year, the information and cultural industries sector is set to be up 1.9 per cent (with the the telecom subsector up 2.4 per cent), and the educational services sector will see a 0.4 per cent.
With Prime Minister Justin Trudeau reportedly consulting with economic stalwarts such as former Bank of Canada governor Mark Carney and Michael Sabia, former CEO of Caisse de dépôt et placement du Québec., the government will need to find innovative ways to stimulate the economy and give the private sector reasons to start spending again.
