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Private sector investment in mining, energy to plummet

HEATHER SCOFFIELD

Wednesday, February 25, 2009

In its key annual survey of what businesses and governments plan to do with their money, Statscan showed that total investment in non-residential construction, machinery and equipment are expected to fall to $237.5-billion in 2009, down 6.6 per cent from 2008.

Public sector capital spending is poised to rise 9.5 per cent – as governments gear up huge stimulus packages to slow the recession – but that increase is more than wiped out by the scale-back in private-sector activity.

In particular, investment in mining, oil and gas is likely to plummet 26.4 per cent in 2009, taking its toll on the Alberta and British Columbia economies, Statscan said.

Excluding that sector, the decline in private-sector investment would have been cut in half.

While the survey of investment intentions is not a widely-watched indicator, it is an important piece of the puzzle to figuring out how Canada's economy will fare in the global crisis. Business investment creates employment, spurs confidence, and keeps the economy on its feet.

But the survey shows that business is taking a time out, ceding space to the public sector. The public sector share of total capital spending will climb from 28.6 per cent in 2008 to 33.5 per cent in 2009, if investment intentions pan out as expected.

That amount does not include the most recent announcements from the federal budget, since the survey was taken between October 2008 and January 2009, Statscan said. Still, most analysts and the Bank of Canada don't expect that federal spending to have much of an effect on the Canadian economy until next year.

The investment slowdown is most obvious in the oil sands sector, where companies have cancelled projects in line with a plunging oil price. Investment is expected to total $13.2-billion this year, down more than 30 per cent from last year.

Not surprisingly, manufacturing is also tightening its belt, with investment poised to decline 8.5 per cent to $18.4-billion. The biggest drop in spending intentions is in the wood products sector, where investment is expected to fall 28.8 per cent, followed by petroleum and coal products, and transportation equipment.

By region, Alberta and British Columbia will see the biggest drops, while Ontario and Quebec can expect the public sector to make up for most of the retrenchment of the private sector.

“There is nothing shocking in this report, since it was reasonable to expect a sharp reduction in investment spending this year as companies scale back production and mothball excess capacity,” commented economists at Scotia Capital Inc., adding that the survey has a “spotty record” of predicting actual investment outlays.

Still, Statistics Canada considers the survey to be central to understanding how the economy works, especially during a recession when business investment is crucial to the smooth functioning of the economy.

© The Globe and Mail