Capital spending set to increase in 2017 as energy sector recovers from slump

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Canada's capital spending is poised to increase for the first time in three years in 2017, albeit only slightly, as government infrastructure outlays continue to pick up and the oil and gas sector pulls out of its investment nosedive.

Statistics Canada's annual survey of capital spending intentions showed that the country's public- and private-sector organizations plan to spend $240.5-billion on non-residential construction, machinery, equipment and repairs this year, up 0.8 per cent from their estimated 2016 spending levels. That marks a modest turnaround from the previous two years, in which spending declined a combined 12.3 per cent, largely a result of plunging oil and gas investment in response to a crash in commodity prices.

Companies in the oil and gas extraction sector plan to increase their capital spending by 2.3 per cent this year, after dramatic 30-per-cent-plus declines in each of the two previous years. Statscan said the increase is mostly due to a pickup in construction of conventional oil and gas projects. The sector has been helped by a nearly 30-per-cent rise in the price of oil over the past year, although the current North American benchmark price of $53 (U.S.) a barrel is still too low to be profitable for Canada's big unconventional oil sands mining projects.

Meanwhile, government capital spending is poised to grow further in 2017 after a strong increase in 2016, reflecting in part the sharp increase in infrastructure investment programs under the federal Liberal government elected in the fall of 2015. Public-sector spending is expected to increase 4.9 per cent this year, adding to last year's 10.9-per-cent increase.

By contrast, overall private-sector capital spending plans are down 1.6 per cent from last year, despite the improvement in the oil and gas industry. Only seven of 20 industry sectors plan to increase spending this year, Statscan said.

Investment in the mining sector is expected to decline for a fifth consecutive year, amid continued historically low prices for many metals. Capital investment plans in the manufacturing sector also remain sluggish, down 4.4 per cent from 2016, after an up-and-down year for Canadian manufacturing exports.

Economists said the modest improvement in capital spending will be a positive for the Canadian economy this year, as the slump in spending the past two years has weighed heavily on growth. And the small turnaround in the oil and gas sector is encouraging, suggesting that the biggest weak spot in the economy over the past two years is finding stable ground.

However, the still-tepid overall spending intentions, particularly in the private sector, will likely continue to be a source of concern for the Bank of Canada, which has long argued that a revival in non-energy business investment is a critical ingredient in a sustained recovery of the Canadian economy. Private-sector spending on machinery and equipment – often looked at as a key signal for business confidence and economic growth – is expected to fall 5.4 per cent from last year, its third consecutive decline.

And economists cautioned that the new trade-protectionist climate in Washington under new U.S. President Donald Trump may complicate business spending decisions in the coming months, as companies face new uncertainties about possible U.S. policy changes and their ramifications for investments.

"It is likely that the lack of clarity regarding the future of the Canada-U.S. trade relationship at present may be holding back capital investment," Toronto-Dominion Bank economist Dina Ignjatovic said in a research note. "Indeed, should trade negotiations go poorly, it is possible that business capital spending may come in short of the expectations reported today."