Snapshot #5 (Outlook for non-residential investment brightest since 2018) at the beginning of this year spotlighted three forward-looking investment indicators that were pointing higher. First, the Bank of Canada’s (BoC) Winter Business Outlook Survey reported a solid gain in the number of firms planning to boost their investment in machinery and equipment over the next 12 months. Second, the Conference Board of Canada’s Business Index signaled firms were “ready to ramp up their investments in the near term”. Third, Statistics Canada’s Non-Residential Capital and Repair (CAPEX) Survey of 25,000 private and public enterprises reported on their plans to ramp up spending by +7% this year following a -9.2% drop in 2020.
Unfortunately, the picture painted by those indicators has not been as bright as promised. Year-to-date (September) the volume of business gross non-residential fixed capital formation is down by -1.7%. Firms have scaled back their investment plans due to third wave COVID-19 impacts, labour shortages, supply chain issues, and heightened uncertainty about Canada’s regulatory environment.
Investment outlook improved between COVID Waves
As the impact of the third wave of COVID dissipated and we attempted to “look through a glass darkly” at the near-term outlook for capital spending, we were initially encouraged by the results of the Bank of Canada’s Third Quarter/2021 Business Outlook Survey. It noted that “firms anticipate stronger demand as pandemic conditions improve”. Supply constraints were viewed as likely to limit sales, but a record number of firms were planning to invest more in machinery and equipment. This upbeat outlook was reinforced by a sustained increase in investor confidence as reflected by the +19% year-to-date increase in the S&P/TSX Composite Index and negative real interest rates.
Near term investment outlook dims
Over the past few weeks, however, several developments have prompted a scaling back in expectations about the strength of the recovery in capital spending. First, the Conference Board of Canada’s Index of Business Confidence dropped by 19 points in November to 85.6, its lowest value since mid-2020. Factors contributing to this retreat included supply chain issues and the rapid escalation of consumer and producer prices on both sides of the Canada/U.S. border.
Second, after hitting a two-year high of 82.0% in the second quarter, Statistics Canada is reporting that the all-industry capacity utilization rate retreated to 81.4% in the third quarter. This suggests less pressure on firms to increase the size of their physical plant or add new equipment.
Third, the unexpected onset of the Omicron variant of COVID-19 virus has caused several provincial governments to reintroduce measures to limit in-person gatherings.
The fact that employment in Canada in November (19,162 million jobs) was slightly above its pre-pandemic peak in January 2020 (19.151 million) is evidence governments and businesses have coped successfully with the four COVID waves that have swept across the country since March of last year.
Although Omicron is more transmissible than previous variants, it does not appear to cause more severe outcomes, particularly among individuals 18 to 39 years of age. Furthermore, the pre-emptive distribution of booster vaccine shots will likely increase protection against severe infections. Nevertheless, firms will temporarily put some projects on hold until they are better able to gauge the consequences of the Omicron virus.
Labour shortages dampen longer-term investment outlook
The one factor which, in our view, threatens to impede capital investment in Canada over the longer term was recently highlighted by the Canadian Federation of Independent Business (CFIB) and by Dr. Jack Mintz, Palmer Chair of Public Policy at the University of Calgary. According to the CFIB, half of Canadian small businesses are experiencing acute shortages of labour, that will be made more acute by an aging population. Dr. Mintz has noted that by the end of this decade, the percentage of the population aged 65 and older will account for 22% of the population, up from 19% in 2019.
The government’s plans to raise the country’s immigration limit will partially offset the impact of the shrinking labour force. Despite this increased intake of permanent residents, however, the shortage of skilled workers in Canada’s construction industry (which has the third-highest job vacancy rate among Canada’s 16 major sectors) will weigh on non-residential industrial and commercial building going forward.
John Clinkard has over 35 years’ experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Non-residential investment vs industrial capacity utilization
Data Source: Statistics Canada. Chart: ConstructConnect — CanaData.
NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.
Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.
“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”
Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.
Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.
Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.
Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.
In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.
The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.
And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
