Poloz Odyssey Endures as Business Dries Up: Canada Economy Watch

(Bloomberg) — Forget data last week showing Canada’s economy is growing at the fastest pace since the collapse in oil prices two years ago. There’s just something not right about the recovery, largely because the nation’s businesses seem to be running for the exits.

Here are some numbers:

  • While GDP data show the economy averaged quarterly growth of 3.2 percent in the second half of 2016, non-residential business investment has fallen in eight of the past nine quarters, and is down 19 percent over that time.
  • The two-year decline is the biggest since at least 1981, when the current GDP data set begins. Older data sets aren’t comparable, but can be indicative, and they show the drop may be the biggest since the 1950s.
  • Investment in machinery and equipment now represents 3.7 percent of GDP. That’s the lowest share of the economy since at least 1981, possibly in the post-World War II era.

Bad Intentions

Nor is there much evidence that would suggest a rapid recovery. Statistics Canada released capital spending intentions data that show, outside of real estate and government, companies expect to continue pulling back in 2017. Spending intentions fell in 13 of the 20 categories, the most since the data series began in 2006. It was also the third straight year intentions fell in more than half the surveyed industries.

Spending plans in the manufacturing category fell for a second-straight year for a combined C$3.5 billion ($2.6 billion) decline. Intentions were down for a third year in a row in the oil and gas sector, representing a cumulative drop of C$18.7 billion. 

On the flip side, consumer spending now seems to be carrying much of the burden, representing an abnormally-high proportion of total GDP.

Week Ahead

  • House of Commons resumes sitting
  • Bloomberg Nanos Consumer Confidence Index (Monday, 10 a.m.)
  • International merchandise trade (Tuesday, 8:30 a.m.)
  • Ivey PMI (Tuesday, 10 a.m.)
  • CMHC housing starts (Wednesday, 8:15 a.m.)
  • Building permits, labor productivity (Wednesday, 8:30 a.m.)
  • Industrial capacity utilization, new housing prices (Thursday, 8:30 a.m.)
  • Labor force survey (Friday, 8:30 a.m.)

Et tu, services?

While the Bank of Canada has been scaling back expectations for business capital spending, it’s been highlighting one new source of investment growth: services.

The sector “has underpinned total business investment in recent years” and “looking ahead, service sector investment should continue to increase,” policy makers said in the January Monetary Policy Report.

Which makes the capital spending intentions data released last week even more troubling. Investment plans for service-related industries are expected to be slightly down in 2017, after three years of strong growth.

Far From Home

It’s no wonder Bank of Canada policy makers have been busy highlighting worries about the economy, even in the face of all the strong data. To Poloz — at least based on what he said at the start of his tenure in 2013 — business confidence and investment is a crucial component of what he’s described in the past as a natural, self-sustaining path of growth.

The title of his first speech as governor in 2013 was “Reconstruction: Rebuilding Business Confidence in Canada,” where he outlined the importance of the creation of new firms. Here is an excerpt:

“The sequence we can anticipate is the following: foreign demand will build; our exports will strengthen further; confidence will improve; existing companies will expand; companies will invest to increase capacity; and new ones will be created.”

In his second speech as Governor, he elaborated on what Canada’s economy will look like when “we get home” in a speech entitled Returning to Natural Economic Growth.

“New companies create new jobs, which create new incomes, which get spent, creating a virtuous circle of self-sustaining growth. That’s what makes it natural.”

Canada’s economy today is one reliant on heavily indebted consumers and policy-induced stimulus. The odyssey continues.

©2017 Bloomberg L.P.

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