Low loonie to boost manufacturing sector: CIBC

With an increase in investment not seen since 2006, Canada’s beleaguered manufacturing sector is poised for a recovery, energized by a lower loonie, says a new report from CIBC Capital Markets.

“It appears a rotational shift in capital spending is finally underway, which will make the economy far less vulnerable to the cyclical ups and downs of the oil patch,” says Benjamin Tal, deputy chief economist at CIBC Capital Markets. “2017 should see more strength as profits recover and a cheap Canadian dollar lifts external demand.”

Read: 2 reasons the BoC won’t cut rates

To the extent that in the last cycle energy and residential investment worked to crowd out spending in other industries, the coming years should see increased appetite for spending on machinery and equipment in the non-energy space, the report says.

“And, it might be happening already,” says Tal.

In fact, 18 of the 22 industries in Canada’s manufacturing sector reported positive growth in spending intentions, and nine industries reported intentions to increase spending by more than 20%.

Although capital spending in a small number of relatively larger industries, such as food and auto parts, has been negative, recent export numbers suggest that these may be turning a corner, auguring for a need to invest in capacity ahead, with the Bank of Canada’s first-quarter Business Outlook Survey giving further hope for a turn higher.

Read: Global trade growing, but Canada falling behind

Tal forecasts non-resource spending to rise by 2.5% this year and nearly 5% in 2017. Last year, it was a negative 1.9%. “The Achilles heel of Canadian investment is in the area of machinery and equipment, where growth has disappointed not only in absolute terms but also relative to performance south of the border,” he says.

At the current negative 2%, the gap between Canada and the U.S. machinery and equipment investment as a share of GDP is the widest it’s been in nearly 30 years. That reflects the effect of a previously over-valued Canadian dollar on plant location decisions and the very strong post-recession recovery in U.S. machinery and equipment spending. “In fact, at no point over the past few decades did M&E investment intensity in Canada exceed that of the U.S. – even at the darkest days of the great recession,” the report says.

In the oil patch, capital spending “fell by a thumping one-third” in 2015 — the largest decline since the great recession.

Read: Canadian economy coming to life: Nasdaq analyst

When oil prices recover, a quick turnaround in energy-related investment isn’t likely as the correlation between price and spending is probably much lower than it was in the pre-shale era, Tal adds. He expects energy-related investment is expected to decline by another 20% this year and advance only modestly in 2017.

“The absence of an old fashion swing producer in the market is likely to result in increased volatility in the price of crude, which in turn, would make CEOs more cautious with new investment,” he says.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.