After the Bank of Canada reported in its Winter Business Outlook Survey (released on January 9, 2017) that investment intentions recovered further late in 2016, it is not surprising that Statistics Canada’s Non-Residential Capital and Repair (CAPEX) Survey (released on February 28) revealed that capital spending on non-residential (tangible) assets is likely to strengthen in 2017 following back-to-back declines in 2015 and 2016.
There is only one problem. According to the CAPEX survey, after contracting by -7.6% and -5.0% in 2015 and 2016 respectively, total capital spending is projected to increase by a mere 0.8% in 2017, making it the weakest recovery in capital spending since 1993.
Virtually all of the retreat in total capital spending in 2015 and 2016 was the result of a sharp contraction in private sector spending which, because it accounts for two-thirds of total spending, outweighed gains in public sector capital spending of 6.5% in 2015 and 10.9% in 2016.
As noted above, the CAPEX survey is calling for a slight increase in total capital spending. However, as has been the case over the past two years, this projected rise is the result of a 4.9% gain in public sector spending that more than offsets a further 1.6% shrinkage in private sector capital spending.
Across the country, capital spending intentions strengthened in Quebec (+4.9%), Ontario (+4%) and British Columbia (+3.4%) primarily on account of significant increases in public sector capital spending, while spending in Saskatchewan (+3.4) should be fuelled by a 4.5% recovery of private sector spending.
According to the CAPEX survey, total capital spending in the two most resource dependent provinces is projected to trend lower in 2017. Newfoundland and Labrador is projected to see total spending drop by a breath-holding -17.7%, while spending in Alberta is anticipated to retreat by -1.9%.
The major industries exerting the most drag on private sector capital spending in 2017 include mining and quarrying (excluding oil and gas extraction), manufacturing and retail trade. Particularly large contributors to the drop in mining and quarrying occurred in Saskatchewan and to a lesser extent in Quebec and Ontario.
Against the background of near record low interest rates, the significant (almost 25%) devaluation of the Canadian dollar over the past three years and a strengthening tailwind from the U.S., capital spending by manufacturers is projected to decline by -4.4% in 2017 after contracting by -15% y/y in 2016.
Across the country, the CAPEX survey reported that spending in the manufacturing sector is projected to decline in six of the ten provinces led by New Brunswick (-36%), Saskatchewan (-26.1%), British Columbia (-17.4%) and Alberta (-14.4%).
Despite the headwinds of high hydro rates, a recently introduced cap and trade carbon tax and potentially restrictive labour legislation, capital spending intentions of manufacturing firms in Ontario posted an 8.3% gain in 2017 following a 14.2% decline in 2016.
In spite of the significant uncertainties regarding the potential impact of the new U.S. administration on Canadian trade while the CAPEX survey was in progress, the gradual uptrend in energy prices since the beginning of 2016 appears to have caused organizations in the oil and gas extraction subsector to increase their planned capital spending.
In 2017, these firms are expected to increase their investment by 2.3% in 2017 following back-to-back declines of -32.9% and -30.3% in 2015 and 2016 respectively. Moreover, given the U.S. administration's recent announcement that the pipe for the completion of the Keystone pipeline can be sourced outside the U.S., the outlook for capital spending oil and gas extraction in Alberta and Saskatchewan is brighter now that it was just a few months ago.