Potash, Suncor Spending Props Up Canada Economy as Consumer Spending Wanes
Canada’s Capital Spending Propping Up Economy
Geoff Howe/Bloomberg
The data suggest commodity companies such as Potash Corp. of Saskatchewan Inc., which faces a hostile takeover by BHP Billiton Ltd. sustained growth even as the global outlook weakened.
The data suggest commodity companies such as Potash Corp. of Saskatchewan Inc., which faces a hostile takeover by BHP Billiton Ltd. sustained growth even as the global outlook weakened. Photographer: Geoff Howe/Bloomberg
Canadian commodity producers are investing at the fastest rate since 2007, a signal resource companies will provide a floor to slowing economic growth as homebuyers and consumers show signs of restraint.
Capital expenditure by commodity producers on the Standard & Poor’s/TSX Composite Index was up 43 percent from a year earlier in their latest quarterly filings, according to data compiled by Bloomberg News. Spending by oil and gas companies surged 58 percent and mining companies spent 12 percent more, accounting for almost all the expenditure growth.
The data suggest commodity companies such as Potash Corp. of Saskatchewan Inc., which faces a hostile takeover by BHP Billiton Ltd., and Suncor Energy Inc. sustained growth even as the global outlook weakened. Investors look to companies to gauge the strength of recoveries because business investment contributed one quarter to one half of growth at the height of expansions over the past four decades, according to Statistics Canada.
“We’re seeing so many pockets of the Canadian economy begin to ramp down, but the investment side is one of those areas we see providing offsetting strength,” said Derek Burleton, deputy chief economist at TD Bank Financial Group. “That’s what’s going to keep the economy growing.”
Economists surveyed by Bloomberg predict Canada’s growth slowed to a 2.5 percent annualized rate in the second quarter, less than half of the 6.1 percent first-quarter pace, according to the median of 12 forecasts. The central bank predicted last month a 3 percent growth rate in the second quarter.
Slowing Growth
The U.S. Commerce Department today revised its estimate for second quarter annualized growth to 1.6 percent, from an initial estimate of 2.4 percent.
“It’s a good story. It’s better than what’s going on in the U.S.,” said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, which manages $4 billion. “Resource prices move up, and when company presidents and CFOs get a sense pricing is going to stay here, they tend to loosen the purse strings and spend.”
Canada’s gross domestic product report for the second quarter will be released Aug. 31 and the data may show weakening in areas outside of corporate investment. Employment, wholesale and retail sales reports this month have failed to meet economist forecasts, while the country’s trade deficit was higher than expected. Government stimulus measures are set to expire at the end of March.
Policy Rate Changes
Bank of Canada policy makers meet Sept. 8 to determine whether to raise interest rates for a third time since June 1. The odds of the bank raising its policy rate to 1 percent has fallen to 48 percent from as high as 76 percent earlier this month, according to a Credit Suisse Group AG calculation derived from overnight index swaps.
Spending outside of the resource sector is lagging, the Bloomberg data show. While overall corporate investment for Toronto-listed stocks was up 28 percent in the latest quarterly filings, the fastest pace since the fourth quarter of 2007, spending excluding commodity producers was up 3.4 percent.
The Bank of Canada, the only central bank among Group of Seven nations to raise interest rates this year, said last month that overall corporate spending still appears to be restrained by global uncertainties and will pick-up less quickly than in previous recoveries.
Growth Contribution
The central bank predicted in its July 22 Monetary Policy Report that business investment will contribute 0.1 percentage point to its projection of 3.5 percent growth in 2010, and 0.7 percentage point to next year’s 2.9 percent expansion.
Changes in the pace of capital expenditure for listed companies have foreshadowed changes in business investment growth 62 percent of the time since 2005, according to Bloomberg data.
The increase in capital spending by oil and gas companies is the fastest since the first quarter of 2003. Four companies recorded more than C$1 billion in capital expenditures in the previous quarter -- Canadian Natural Resources Ltd., Suncor, Talisman Energy and Encana Corp. A year ago, only TransCanada Corp., a pipeline company, spent more than that.
Potash Corp. and Barrick Gold Corp. are among non-energy commodity companies that have led gains in capital expenditure in the latest filings.
U.S. Uncertainty
Business investment adjusted for inflation rose at an 0.9 percent annualized pace during the first quarter, and was down 8 percent on a year-over-year basis, according to Statistics Canada data. The country’s current earnings season ends on Sept. 2.
“We’ve been through the worst global recession in 50 years, we’ve got this tremendous uncertainty regarding the U.S. outlook and we’ve got this extremely highly valued currency,” said Doug Porter, deputy chief economist at Bank of Montreal’s investment unit in Toronto. “Businesses are showing a lot of caution.”
The Bank of Canada last month published a chart showing it will take 11 quarters for business investment to reach levels consistent with previous recoveries. Bloomberg calculations derived from the chart imply an annualized growth rate in business investment of about 14 percent in the second quarter, and a projected average rate of more than 5 percent in the following six quarters.
To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net; Ilan Kolet in Ottawa at ikolet@bloomberg.net
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