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Lack of business investment could derail Canada’s economic growth: Conference Board

Jun. 2, 2016 – Business investment outside of the energy sector remains sluggish, despite many manufacturing industries being at or close to full capacity, according to a briefing released this week by The Conference Board of Canada.

The Conference Board found the following highlights:

• In order for exports to continue to drive economic growth, a pickup in non-energy investment aimed at expanding productive capacity is needed.
• The 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 the 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.

“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 the briefing. “If non-energy investment does not rebound over the coming months, capacity constraints in some manufacturing industries could impact future growth.”

According to the Conference Board, 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,” it notes.

In the fourth quarter of last year, the wood products manufacturing industry was operating at 99.3 per cent capacity, it says, adding that 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, it says.

Despite many manufacturing industries operating near capacity, businesses remain reluctant to invest, finds the board, noting that in fact, various manufacturers expect to cut investment this year by an average of nearly 11 per cent. The board says, “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 as reasons for not investing.