Business investment outside of the energy sector remains sluggish, despite many manufacturing industries being at or close to full capacity, according to a new briefing released by The Conference Board of Canada.
Ottawa, May 30, 2016—Business investment outside of the energy sector remains sluggish, despite many manufacturing industries being at or close to full capacity, according to a new briefing released by The Conference Board of Canada.
“For the past year, we at the Conference Board have stressed the need for a rebound in business investment to support Canada’s economic growth,” said Matthew Stewart, Associate Director, Economic Forecasting and co-author of Capacity Constraints Could Stymie Economic Growth. “If non-energy investment does not rebound over the coming months, capacity constraints in some manufacturing industries could impact future growth.”
- In order for exports to continue to drive economic growth, a pickup in non-energy investment aimed at expanding productive capacity is needed.
- Our current economic outlook assumes a modest increase in non-energy investment spending in the second quarter with a stronger pick up in the second half.
- Current business investment intentions are much more pessimistic than what is included in our current economic outlook.
- Most leading manufacturing industries have reached or nearly reached their capacity to continue to grow.
- Manufacturing industries in particular are expected to reduce capital expenditures this year by an average of 10.9 per cent.
- Without a pickup in investment, capacity constraints have the potential to upset recent economic momentum.
The transportation equipment, wood products, food, primary metal and paper industries have been the key drivers of manufacturing growth in Canada, accounting for 64 per cent of year-over-year increases in output. These manufacturing industries, which have been leading Canada's rebound in exports, are at or fast approaching full capacity. In the fourth quarter of last year, the wood products manufacturing industry was operating at 99.3 per cent capacity. Paper manufacturing was not far behind, operating at 98.2 per cent and transportation equipment operated at 97.3 per cent of its capacity. Meanwhile, transportation equipment manufacturing recorded its highest capacity utilization rate in history in the third quarter of 2015.
Despite many manufacturing industries operating near capacity, businesses remain reluctant to invest. In fact, manufacturers across a range of industries expect to cut investment this year by an average of nearly 11 per cent. Moreover, the transportation equipment, wood products, food, primary metal and paper manufacturers are expected to post worse-than-average investment declines.
In the Conference Board's Index of Business Confidence survey, business leaders cited weak market demand, government policies, a shortage of qualified staff, and the depreciation of the Canadian dollar (which increases the cost of imported technology and machinery) as reasons for not investing. While market demand should improve as the U.S. economy continues to strengthen, the remaining factors—government policies, a shortage of qualified staff, and the depreciation of the Canadian dollar—will likely continue to hold back investment.
While we still expect non-energy investment spending to pick up in the second half of the year as accelerating demand from the U.S. improves the incentive for firms to expand their capacity, the continued lack of investment has the potential to severely limit Canada’s future growth.