Bank of Canada sees business investment rising

46% of firms surveyed plan to invest more

October 08th, 2010
By CBC News

The Bank of Canada says Canadian business leaders appear to be gearing up to increase the country’s lagging productivity.

Firms that were surveyed said they plan to invest in modernizing their machinery and equipment over the next year, the Bank of Canada said Friday in its latest quarterly business outlook.

Forty-six per cent said they would spend more, while only 10 per cent said they would spend less — a 36-point differential that is a record for the central bank’s survey on this question.

“Following a period of restraint in investment expenditures, many firms reported plans to resume more normal levels of spending,” the bank said in its analysis.”

“The increase in this indicator is widespread across all regions and sectors.”

Investments in new technology and infrastructure are seen to be key to productivity gains, so the uptick in capital spending expectations is encouraging.

But as BMO economist Doug Porter noted, “one can’t help but wonder if survey respondents were especially upbeat since it was the Bank of Canada asking, as governor Carney has recently lashed business over its supposed unwillingness to invest.”

Productivity is a complex measure of how much additional value a country creates using labour, equipment, raw materials and investment capital in the production of final goods and services.

The Toronto-based Institute for Competitiveness & Prosperity reported in June that Canada’s gross domestic product per capita trailed the U.S. by $9,300 Cdn or 17 per cent in 2009, essentially unchanged from the 2008 gap of $9,400.

Earlier this week, the C.D. Howe Institute warned that Canada’s productivity gap with the U.S. and other large advanced economies was widening and that the situation could not continue without a hit to the country’s standard of living.

The report found the main cause was significantly lower investment by firms over the past two decades.

Central bank governor Mark Carney has taken up the cause in the past year, at times calling out corporate leaders to take advantage of government breaks, lower taxes, the strong loonie and record-low interest rates to prepare for the competitive nature of the post-crisis economy.

A strong currency and low interest rates make it cheaper to import new equipment.

Employment gains

The outlook also gauged a generally positive employment outlook.

Thirty-nine per cent of firms reported they expect to increase hiring during the next 12 months. That compares with 14 per cent who reported they expect to cut workforces.

The 25 percentage point difference between employment bulls and bears is encouraging, but it’s down from 40, the level it was at in the bank’s last outlook. “The balance of opinion has declined from the levels seen earlier in the recovery,” the bank noted.

And credit conditions — a key catalyst to the worldwide recession that began in 2008 — appear to be improving, the survey found. Twenty-seven per cent of firms said lending conditions had eased during the last quarter, while only 11 per cent reported that lending had tightened.

The net balance of firms reporting tighter credit standards fell yet again, and is now all the way back to pre-credit crisis levels, Porter noted.

The survey summarized interviews conducted by the bank’s regional offices with the senior management of about 100 firms from Aug. 16 to Sept. 16.

The firms were selected to reflect the different sectors of the economy. The bank’s aim was to gather the perspectives of these businesses, but the sample is so small that the results cannot be taken to represent a statistically accurate survey of all businesses.