(Bloomberg) — The velocity of the U.S. economy’s post-pandemic rebound hinges on more than just an increasingly capable consumer, and business spending appears poised to deliver its own boost.
Economic growth balances on a combination of factors, notably consumer spending, housing demand, government outlays and investment. And while household spending is poised to surge in the next two quarters, capital investment is already flexing its muscle.
Like the rest of the economy, nonresidential fixed investment — including capacity-enhancing projects such as warehouses, distribution facilities, machinery, computers and software — plummeted in the first half of 2020. But in the last half of the year, business spending surged, driven in large part by investment in equipment.
Alphabet Inc.’s Google, PepsiCo Inc. and retailer Urban Outfitters Inc. are among companies investing in operations as businesses seek more efficiency or adapt to changing consumption habits in a post-Covid world.
In the fourth quarter, when consumers pulled back after a record pace in the previous three months, nonresidential outlays raced ahead and outpaced personal spending by the most since 2011 in percentage terms. More recent monthly data show business investment growth continues to roll on.
From August through January, orders for capital goods excluding military hardware and commercial aircraft — a proxy for business investment — posted the strongest six-month annualized pace of growth in data back to 1992.
And that trend is seen continuing as Covid-19 vaccinations increase, government officials loosen business restrictions and household spending quickens.
“As consumption rebounds, we think that business investment will also grow just as quickly, if not more quickly than consumer spending,” said Brian Rose, senior economist Americas at UBS Group AG.
Part of that may reflect pent-up investment. A recent Census Bureau survey of small businesses found that nearly a fourth of the respondents had postponed their planned 2020 capital expenditures. As economic growth strengthens, smaller firms could join larger companies in plowing more capital into their businesses.
A Deloitte LLP survey of 128 chief financial officers across North America showed first-quarter capital spending in the U.S. rising 9.8% from a year ago.
Investment in equipment will rise another 15.5% on an annualized basis in the first quarter after growing 25.7% in the final three months of 2020, according to the latest Federal Reserve Bank of Atlanta GDPNow estimate. Intellectual property and outlays for nonresidential structures are also seen advancing further.
“The pandemic itself and the aftermath will require business investment,” Rose said.
For instance, when a restaurant reopens under new management, some of the idle equipment can be re-used but still, a sizable amount of investment is required to retool the space. An estimated 91,000 restaurants and bars closed in 2020, the bulk of which were small, according to data compiled by Technomic, a Chicago-based research company. Some of these spaces are being converted into chains and ghost kitchens.
“Companies that couldn’t keep their head above water had to pull the plug, but there are opportunities out there to change business models,” said Jennifer Lee, senior economist at BMO Capital Markets. “Changing things around to keep your customers and yet keep the lights on — that spurs spending.”
Other investments may be more structural, such as adding more warehouses and distribution centers or perhaps re-designing or converting office space. Google said Thursday that it’s planning a $7 billion investment in offices and data centers that could create 10,000 new jobs this year.
Frank Conforti, chief operating officer of Urban Outfitters said on a March 2 earnings call that capital expenditures are planned at about $250 million for the clothing retailer’s fiscal year, in large part because of the construction of a new distribution facility just outside of Kansas City.
New technologies, such as 5G, may also come into play. As will broader initiatives like shifting to more environmentally friendly products and business practices.
Boeing Co. received 82 orders in February — its second-best month in two years — as some airlines shift toward more fuel-efficient planes.
The rise of automation will also play a role. Research has shown the pandemic accelerated the automation of jobs, and by 2025 the World Economic Forum estimates the time spent on current tasks by humans and machines will be equal. Half of the employers surveyed for the report said they planned to accelerate automation as a result of Covid-19.
Hugh Johnston, chief financial officer of PepsiCo, said in February that he expects capital spending to remain “elevated for the next couple of years” as the company looks to increase plant automation and capabilities.
Low borrowing costs have the potential of supporting capital investment, though research shows mixed evidence on the impact of interest rates and business spending.
For the businesses that can invest, the recently-signed $1.9 trillion pandemic relief bill — the second-largest stimulus package in U.S. history — offers an additional incentive.
“You’ve got unprecedented amounts of fiscal stimulus coming,” BMO’s Lee said. “It’s a pretty powerful tailwind for economic growth and for businesses as well.”
(Adds fourth paragraph on companies investing)
©2021 Bloomberg L.P.
Canada’s budget to include pandemic and childcare supports, luxury tax
By Steve Scherer
OTTAWA (Reuters) – Canada will present a budget on Monday with billions of dollars for pandemic recovery measures as COVID-19 infections skyrocket, C$2 billion ($1.6 billion) toward national childcare, and new taxes on luxury goods.
Liberal Prime Minister Justin Trudeau’s first budget in two years will also set aside C$12 billion ($9.6 billion) to extend wage and rent subsidy programs to the autumn, the Toronto Star reported on Sunday.
Finance Minister Chrystia Freeland is due to present the budget at about 4 p.m. (2000 GMT).
The document promises in excess of C$2 billion as a “starting point” for a national childcare program, the Canadian Broadcasting Corp said, adding that the 2020-2021 federal deficit had come in under C$400 billion.
In November, the government forecast a deficit of C$381.6 billion, which would be its highest level since World War Two. [https://tmsnrt.rs/3wSJPcm]
The budget will also include a luxury tax effective from 2022 on new cars and private aircraft valued at more than C$100,000 ($79,970), and boats worth over C$250,000, government sources familiar with the document told Reuters.
There will be a sales tax for online platforms and e-commerce warehouses from July, and a digital services tax for Web giants like Alphabet Inc’s Google and Facebook Inc from 2022.
Freeland promised in November up to C$100 billion in stimulus over three years to “jump-start” an economic recovery during what is likely to be an election year, and the government so far not backed away from that commitment.
Environment Minister Jonathan Wilkinson, speaking to the CBC, confirmed that the budget would be “ambitious” and that the government would “invest for jobs and growth to rebuild this economy,” although he added there would be “fiscal guardrails” to put spending on a “sustainable track.”
Amid a spiking third wave of infections, Ontario, Canada‘s most-populous province, announced new public health restrictions on Friday, including closing the province’s borders to non-essential domestic travel.
Canada has been ramping up its vaccination campaign but still has a smaller percentage of its population inoculated than dozens of other countries, including the United States and Britain.
($1 = 1.2514 Canadian dollars)
(Reporting by Steve Scherer; Editing by Nick Zieminski and Peter Cooney)
TSX extends gains as gold prices rise, set to rise for third week
(Reuters) -Canada’s main stock index extended its rise on Friday after hitting a record high a day earlier as gold prices advanced, and was set to gain for a third straight week.
* At 9:40 a.m. ET (13:38 GMT), the Toronto Stock Exchange‘s S&P/TSX composite index was up 24.24 points, or 0.1%, at 19,326.16.
* The Canadian economy is likely to grow at a slower pace in this quarter and the next than previously expected, but tighter lockdown restrictions from another wave of coronavirus were unlikely to derail the economic recovery, a Reuters poll showed.
* The energy sector climbed 0.6% even as U.S. crude prices slipped 0.1% a barrel. Brent crude added 0.1%. [O/R]
* The materials sector, which includes precious and base metals miners and fertilizer companies, added 0.3% as gold futures rose 0.7% to $1,777.9 an ounce. [GOL/] [MET/L]
* The financials sector gained 0.2%. The industrials sector rose 0.1%.
* On the TSX, 117 issues advanced, while 102 issues declined in a 1.15-to-1 ratio favoring gainers, with 14.26 million shares traded.
* The largest percentage gainers on the TSX were Cascades Inc, which jumped 4.2%, and Ballard Power Systems, which rose 2.9%.
* Lghtspeed POS fell 5.6%, the most on the TSX, while the second biggest decliner was goeasy, down 4.9%.
* The most heavily traded shares by volume were Zenabis Global Inc, Bombardier and Royal Bank of Canada.
* The TSX posted 23 new 52-week highs and no new low.
* Across Canadian issues, there were 160 new 52-week highs and 12 new lows, with total volume of 29.68 million shares.
(Reporting by Shashank Nayar in Bengaluru;Editing by Vinay Dwivedi)
Canadian economy likely to slow, but COVID-19 threat to growth low
By Indradip Ghosh and Mumal Rathore
BENGALURU (Reuters) – The Canadian economy is likely to grow at a slower pace this quarter and next than previously expected, but tighter lockdown restrictions from another wave of coronavirus were unlikely to derail the economic recovery, a Reuters poll showed.
Restrictions have been renewed in some provinces as they struggle with a rapid spread of the virus, which has already infected over 1 million people in the country.
After an expected 5.6% growth in the first quarter, the economy was forecast to expand 3.6% this quarter, a sharp downgrade from 6.7% predicted in January.
It was then forecast to grow 6.0% in the third quarter and 5.5% in the fourth, compared with 6.8% and 5.0% forecast previously.
But over three-quarters of economists, or 16 of 21, in response to an additional question said tighter curbs from another COVID-19 wave were unlikely to derail the economic recovery, including one respondent who said “very unlikely”.
“Canada is undergoing a third wave of the virus and while case loads are accelerating, the resiliency the economy has shown in the face of the second wave suggests it can ride out the third wave as well, without considerable economic consequences,” said Sri Thanabalasingam, senior economist at TD Economics.
The April 12-16 poll of 40 economists forecast the commodity-driven economy would grow on average 5.8% this year, the fastest pace of annual expansion in 13 years and the highest prediction since polling began in April 2019.
For next year, the consensus was upgraded to 4.0% from 3.6% growth predicted in January.
What is likely to help is the promise of a fiscal package by Prime Minister Justin Trudeau late last year, which the Canadian government was expected to outline, at least partly, in its first federal budget in two years, on April 19.
When asked what impact that would have, over half, or 11 of 20 economists, said it would boost the economy significantly. Eight respondents said it would have little impact and one said it would have an adverse impact.
“The economic impact of the federal government’s promised C$100 billion fiscal stimulus will depend most importantly on its make up,” said Tony Stillo, director of Canada economics at Oxford Economics.
“A stimulus package that enhances the economy’s potential could provide a material boost to growth without stoking price pressures.”
All but two of 17 economists expected the Bank of Canada to announce a taper to the amount of its weekly bond purchases at its April 21 meeting. The consensus showed interest rates left unchanged at 0.25% until 2023 at least.
“The BoC is set to cut the pace of its asset purchases next week,” noted Stephen Brown, senior Canada economist at Capital Economics.
“While it will also upgrade its GDP forecasts, we expect it to make an offsetting change to its estimate of the economy’s potential, implying the Bank will not materially alter its assessment of when interest rates need to rise.”
(Reporting and polling by Indradip Ghosh and Mumal Rathore; editing by Rahul Karunakar, Larry King)
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