Low loonie to stimulate Achilles heel of Canadian investment,
machinery and equipment spending
TORONTO, April 12, 2016 /CNW/ - With an increase in
investment not seen since 2006, Canada's beleaguered manufacturing sector is
poised for a recovery, energized by a lower loonie, says a new
report from CIBC Capital Markets.
"It appears a rotational shift in capital spending is finally
underway, which will make the economy far less vulnerable to the
cyclical ups and downs of the oil patch," says Benjamin Tal, Deputy Chief Economist at CIBC
Capital Markets and co-author of the Energizing Non-Energy
Investment report with Senior Economist Nick Exarhos. "2017 should see more strength as
profits recover and a cheap Canadian dollar lifts external
demand."
To the extent that in the last cycle energy and residential
investment worked to crowd out spending in other industries, the
coming years should see increased appetite for spending on
machinery and equipment in the non-energy space, the report
says.
"And, it might be happening already," says Mr. Tal.
No less than 18 of the 22 industries in Canada's manufacturing sector reported
positive growth in spending intentions, and no less than nine
industries reported intentions to increase spending by more than 20
per cent, the report says.
Although capital spending in a small number of relatively larger
industries, such as food and auto parts, has been negative, recent
export numbers suggest that these may be turning a corner, auguring
for a need to invest in capacity ahead, with the Bank of
Canada's first-quarter Business
Outlook Survey giving further hope for a turn higher.
Mr. Tal forecasts non-resource spending to rise by 2.5 per cent
this year and nearly 5 per cent in 2017. Last year, it was a
negative 1.9 per cent.
"The Achilles heel of Canadian investment is in the area of
machinery and equipment, where growth has disappointed not only in
absolute terms but also relative to performance south of the
border," he says.
At the current negative 2 per cent, the gap between Canada and the U.S. machinery and equipment
investment as a share of GDP is the widest it's been in nearly 30
years. That reflects the effect of a previously over-valued
Canadian dollar on plant location decisions and the very
strong post-recession recovery in U.S. machinery and
equipment spending. "In fact, at no point over the past few decades
did M&E investment intensity in Canada exceed that of the U.S. – even at the
darkest days of the great recession," the report says.
In the oil patch, capital spending "fell by a thumping
one-third" in 2015 -- the largest decline since the great
recession.
When oil prices recover, a quick turnaround in energy-related
investment isn't likely as the correlation between price and
spending is probably much lower than it was in the pre-shale era,
Mr. Tal adds. He expects energy-related investment is expected to
decline by another 20 per cent this year and advance only modestly
in 2017.
"The absence of an old fashion swing producer in the market is
likely to result in increased volatility in the price of crude,
which in turn, would make CEOs more cautious with new investment,"
he says.
About CIBC
CIBC is a leading Canadian-based financial institution with 11
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www.cibc.com/ca/media-centre/.
SOURCE Canadian Imperial Bank of Commerce