Non-energy investment to boost manufacturing sector: CIBC
Low loonie to stimulate investment in machinery and equipment spending.
TORONTO — 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.
Tal said 2017 should see more strength as profits recover and a cheap Canadian dollar lifts external demand.
In the last cycle energy and residential investment crowded out spending in other industries, but the report says the coming years should see increased appetite for spending on machinery and equipment in the non-energy space.
Eighteen of the 22 industries in Canada’s manufacturing sector reported positive growth in spending intentions, and nine industries intend to increase spending by more than 20%, the report says.
Although capital spending in a small number of relatively larger industries, such as food and auto parts, has been negative, the report says recent export numbers suggest these industries may be turning a corner, auguring for a need to invest in capacity ahead.
Tal forecasts non-resource spending to rise by 2.5% this year and nearly 5% in 2017. Last year, it was a negative 1.9%, which has widened the gap with US spending on machinery and equipment as a share of GDP to its greatest point in 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 US machinery and equipment spending.
In the oil patch, capital spending fell 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, Tal adds. He expects energy-related investment to decline by another 20% this year and advance only modestly in 2017.
Click here for a copy of the report.