The Conference Board of Canada’s Senior Economist Sam Goucher offers the following insights on the February 27th release of data on investment intentions:
Last week’s release of Statistics Canada’s investment intentions survey suggests firms will increase their investment by just 0.2 per cent in Alberta this year. After five years of economic turbulence, the survey suggests businesses remain very risk adverse and are not willing to take any chances on opportunities that rely on positive assumptions. This is lower than the Board’s previous forecast, which estimates nominal non-residential investment will grow 5.7 per cent in 2020.
- The capital spending intentions announced in the survey suggest non-residential business investment will increase by just $100 million or 0.2 per in 2020. This is lower than the current Conference Board forecast. After taking account of inflation, this survey suggests, the volume of investment would experience a moderate decline.
- Budget 2020 will keep the government on the path that began with last year’s budget. Achieving balance through a combination of spending cuts and a reliance on royalty revenues.
- By industry, the largest weakness will occur in transportation and warehousing (-$1.0 billion), where immense demand pressures increased spending on pipeline and rail infrastructure in 2019. The survey shows that agriculture, forestry, fishing and hunting (-$245 million) and manufacturing (-$229 million) are also set to experience a decline in spending.
- The survey does suggest there will be modest increase in oil and gas spending this year, with capital expenditures set to rise $397 million. The Conference Board’s outlook for oil and gas investment is rosier under the assumption that the US portion of Line 3 will be completed this year. When you add in the extra export capacity through pipeline optimization programs and exemptions to the government curtailment program, we expect oil and gas companies will begin to be more optimistic about the timing of new investment.
- Support activities for mining and oil and gas extraction – which consists mostly of drilling services – is expected to see a decline in investment. This is discouraging for the drilling industry, which has arguably suffered the most from turbulence in the energy sector. The number of rigs in Alberta has declined significantly since 2014 where consistently low and volatile oil prices have reduced the incentive to invest.
- On the positive side, the utilities industry is set for a solid increase in investment with a gain of $869 million. Alberta has a number of power generation projects in the pipeline, including Greengate’s Travers Solar project ($500 million), and Suncor’s coal-replacement initiative ($1.4) and Forty Mile Wind Power project ($300 million).
Overall, Statistics Canada’s Investment Intentions Survey indicates that business investment has at least hit bottom. While this isn’t the most positive news for a province whose GDP is still smaller than it was five years ago, we continue to believe that business investment should expand by more than what’s indicated in the survey, with a pick-up in activity towards the end of the year.
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