Canadian companies at capacity, yet still cautious on investment

By Leah Schnurr
OTTAWA, June 1 (Reuters) - Even with some parts of the
Canadian economy operating near capacity, economists say
business investment is unlikely to pick up soon because many
companies are wary about the outlook for growth.
Canadian business investment fell again in the first
quarter, gross domestic product data released on Tuesday showed,
the fifth straight quarterly decline, which weighed on economic
growth.
The business investment decline, heavily influenced by the
oil price slump, contributed to Canada's slip into a mild
recession last year. Stronger business investment, along with a
pick up in exports, is key to the central bank's outlook.
Weak global and Canadian growth expectations mean
businesses do not need to invest as much in expanding their
operations as they might have otherwise, said Eric Lascelles,
chief economist at RBC Global Asset Management.
Additionally, there has been a shift toward risk aversion
and away from investing for growth, he said.
"Sometimes that means leaving something on the table in
terms of growth opportunities and I think that is still very
much central to business decision making around the world right
now," Lascelles said.
The Bank of Canada said in April it expects business fixed
investment will take 0.8 percentage points off economic growth
this year before contributing modestly in 2017. It more recently
noted investment and intentions remain disappointing.
Lascelles expects the bank may have to lower that forecast,
possibly in its next monetary policy report in July.
The bank had highlighted that some sectors, such as wood
products and transportation equipment, are operating at capacity
utilization rates that are close to historical highs, suggesting
they will need to invest in factories and equipment as demand
increases.
But companies may wait to see that the demand is there
first, given the risk that the U.S. economy does not rebound
from a weak first quarter as strongly as anticipated.
That means any bump up in spending in the near-term may be
modest, if it comes at all.
"Autos are running flat out and the problem with that is it
doesn't look as though there's any more investment coming on
that front," said Benjamin Reitzes, senior economist at BMO
Capital Markets, pointing to a fourth-quarter capacity
utilization rate of 97.8 percent for the transportation sector.
"That high number does not portend new investment,
unfortunately."
While there may be some bright spots outside the energy
sector, the drag from the commodity slump is going to be a
bigger weight on overall business investment, said Bill Adams,
senior international economist for PNC Financial Services Group (NYSE:PNC).