Corporate spending may not spur economy: Analysts
10:35 AM, E.T. | February 25, 2011Economy
Canadian companies expect to increase capital spending by 3.8 percent in total this year, a Statistics Canada survey showed Friday, encouraged by surging demand for commodities, and outpacing government spending as economic stimulus measures wind down.
But analysts said the increase is not enough to pick up all the slack left by the decline in government spending and could lead to more sluggish economic growth.
"Those awaiting a capital spending surge to lead the economy and unleash a burst of productivity will be sorely disappointed today," said Doug Porter, deputy chief economist at BMO Capital Markets.
Businesses expect to spend a total of $261.3 billion on construction, machinery and equipment in 2011, with the oil and mining, manufacturing and transportation and warehousing industries investing the most.
But the expected rise in private investment for 2011 is less than half the 8-percent increase noted in 2010, and would bring total investment levels to just short of the 2008 peak.
"The private sector is planning to take the baton from the public sector on the capital spending front this year, but the pace looks more like a 20-kilometer walk than a 100-meter dash," Porter said.
Business investment is closely watched by policymakers in Canada right now as they have predicated their forecasts on a sharp rebound in investment this year following a sluggish period.
The Bank of Canada has urged corporate Canada to boost investment in machinery and equipment to improve productivity and competitiveness. It said in a report in January that it expects business investment and net exports to contribute more to growth as fiscal stimulus, housing and consumer spending play a lesser role as drivers of the economic recovery.
The Statscan survey suggests the shift is starting to happen, but not fast enough for some.
MACHINERY, EQUIPMENT INVESTMENT LAGS
Statscan surveyed 28,000 public and private organizations between October 2010 and January 2011 on their investment intentions.
Total investment intentions are seen rising 3.3 percent in 2011 from preliminary 2010 levels, following 10.3-percent growth last year.
Public sector investment is expected to rise 1.6 percent this year, compared with a 17.5-percent jump in 2010.
Statscan said the construction component accounted for two-thirds of the total increase expected this year with 3.6-percent growth. On the other hand, purchases of machinery and equipment—traditionally a more volatile component reflecting business sentiment—are seen rising only 2.4 percent.
Housing investment in Canada is expected to increase by 1.5 percent this year, following 15.5-percent growth in 2010.
Corporate Canada agrees on the need to boost investment. But Jayson Myers, head of the Canadian Manufacturers and Exporters industry group, has cautioned that economic uncertainty and limited cash flow in hard-hit exporters could delay new spending.
"Businesses are going to wait until they see new customers but the other important part is they need money to make these investments and that money has to come from internally generated cash flow," Myers said in recent comments.