Economists expect rising oil prices will spur investment in businesses
OTTAWA Higher oil prices and a roaring economy are expected to spur a rise in business investment in 2018, several prominent economists said Tuesday, as Canada continues to shrug off any indication that it is headed for a substantial slowdown this year.
Business investment levels in Canada have remained positive in recent years, despite a collapse in oil prices in 2014 that caused widespread retrenchment in the oil and gas sector. But now, with prices for West Texas Intermediate trading well above the US$60 threshold, economy-wide investment is expected to grow back to pre-recessionary levels.
“It’s the start of a bounce back,” said Brian DePratto, a senior economist at TD Bank. “This is not necessarily surprising after two years of negative investment, but it seems we’ve come off that bottom after, in 2017, seeing very, very healthy investment numbers.”
Depratto said other lesserknown sectors, like food manufacturing, have also begun to unexpectedly raise investment levels.
“Business investment has been surprisingly strong,” said JeanFrançois Perrault, the senior vicepresident and chief economist at Scotiabank, whose comments came during panel discussion Tuesday hosted by the Canadian Club of Ottawa.
Projections of higher investment were supported by a report from the Business Development Bank of Canada on Tuesday that expects small- and medium-size companies to invest $140.5 billion in 2018, a three per cent bump the year prior. That figure includes an estimated 79 per cent increase on acquisitions over the year.
Investment in B.C. is expected to lead the country at 17 per cent higher, followed by Alberta (12 per cent) and Quebec (11 per cent). Ontario is expected to see a one per cent decrease in investment, while other provinces could see larger drops.
Higher business investment estimates could be seen as a further indication that the Bank of Canada should raise its overnight interest rate Wednesday. Analysts are in near-unanimous consensus in expecting the BoC to raise rates, particularly after recent data showed a major tightening in the Canadian labour market.
Many analysts have for some time been projecting the Canadian economy to take a steep dive after posting quarterly growth rates last year that were well above four per cent. However, the economy has increasingly outpaced growth expectations.
“We worry a lot about the downside risks,” Perrault said. “But I think we are still potentially underestimating the upsides.”
Business investment, high household debts and still-low wage growth were some of the main concerns that caused the BoC to hold off on further rate hikes last year.
Dawn Desjardins, the vice-president and deputy chief economist at RBC, said she expects business investment to grow over the next 12 months, despite repeated concerns that deep tax cuts in the U.S. could make Canadian businesses less competitive with their counterparts.
“We have a lot of costs to run businesses today,” said “Whether it’s carbon pricing or all these other costs that are rising for businesses — at the same time I do think demand is there, and businesses will continue to this pick up in investment as we go forward.”
The three panellists also saw investment growing despite concerns over negotiations of the North American Free Trade Agreement, which have seemed increasingly likely to fail in recent weeks following media reports.
The analysts generally see the BoC consecutively raising rates in 2018 by about one per cent, and expect inflation to near the bank’s two per cent target range.