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Investment Chill Grips Canada Amid Oil Woes and Trump Threats

  • Capex, FDI languish with firms hitting production constraints
  • Government opts not to match U.S. tax cuts in its budget

More companies are saying no thanks to investing in Canada.

The world’s 10th largest economy is still grappling with the effects of the oil-price crash as its southern neighbor lures work away with tax cuts and protectionist threats. Canada’s struggle to boost investment in this environment threatens both its maturing expansion, which relies heavily on spending by indebted consumers, and its long-term competitiveness.

“Uncertainty isn’t good for investment and uncertainty is high,” Royal Bank of Canada senior economist Nathan Janzen said by telephone from Toronto. “The concern with business investment is always more what it means for growth this year, the year after that, in terms of potentially slower productivity.”

Energy companies are chopping their budgets even as global oil prices climb back from a crash, and may lose about C$16 billion ($12.4 billion) of revenue this year because of discounts on Alberta’s heavy crude -- a problem blamed on a lack of pipeline space. Foreign direct investment in Canada, meanwhile, has fallen to the lowest since 2010.

Another unknown for investment prospects is how companies are dealing with production constraints. As firms bump up against production capacity at this high point in the economic cycle, you’d expect capital expenditure intentions to be widespread across industries. Yet capex is expected to increase just 0.8 percent even with capacity utilization hitting a 10-year high of 85 percent

It’s possible companies are increasingly turning to the labor market to address excess demand, which would explain Canada’s string of red-hot jobs reports last year. That preference could further constrain business investment.

Taxes and Trade

Then there’s Donald Trump. The U.S. president has slashed corporate taxes, is threatening to walk away from the North American Free Trade Agreement and plans to impose hefty tariffs on imports of steel and aluminum.

Businesses were pressing the government to address these challenges, but Finance Minister Bill Morneau declined to cut taxes in his budget this week. He did, however, acknowledge the changing trade landscape Thursday, given Canada relies on the U.S. for three-quarters of its exports.

“We do recognize that as a result of the discussions around Nafta, there are some businesses that are concerned about their opportunities to invest,” Morneau said after a post-budget speech in Toronto. “It will be important for us to maintain our focus on Nafta to make sure we have a strong agreement that can work for all three countries.”

Fourth-quarter gross domestic product will be released Friday and most economists say it’s unlikely to show a major jolt to business spending. The Bank of Montreal’s forecast for economic growth of 2.2 percent this year faces some “downside risk” because of investment weakness, according to senior economist Robert Kavcic.

“There isn’t a lot of appetite for net new investment at this point,” Kavcic said by phone Thursday. “I would really point to the impact of the oil shock because that was dramatic -- it has spread out through the Canadian economy.”

— With assistance by Maciej Onoszko

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