Report: Canadian Economy Shows Good Signs in February

According to a recent report by Statistics Canada (www.statcan.ca), there are several indications that the Canadian economy quickly shrugged off its drop in December and began growing again in the New Year. Housing starts and auto sales posted strong gains. The stock market in February rebounded from its dip in January, reflecting one of the largest jumps in monthly commodity prices during the current boom that began six years ago. Most importantly, firms expanded payrolls in both January and February, consistent with a pickup in investment plans for 2008.


Firms plan to boost nominal business investment about 6% in 2008, according to the annual survey of investment intentions. The increase bettered last year's hike, and was evenly spread between construction and machinery and equipment.

More importantly, higher investment signals that firms intend to spend more for a sixth straight year. In past investment cycles, spending typically started to wane in the fifth year of growth. Of course, past cycles never saw the boom in commodity prices that is also entering its sixth year, and remains the driving force behind investment growth.

Energy continued to fuel higher investment, rising another 10% in 2008. The oil sands and pipelines spearheaded this gain, followed by steady gains for utilities. Energy investment represents 38% of all business investment in 2008, down slightly from its peak of 40% in 2006. It was less than one-quarter as recently as of 1999.

In 2008, oil sands producers intend to invest $19.7 billion, up 23% after a 31% hike in 2007. This exceeds the total investment plans of $19.6 billion by all manufacturing industries. Just a decade ago, oil sands investment was less than one-tenth the capital outlays made by manufacturers ($1.4 billion versus $21.6 billion in 1998).

This shift in investment growth from manufacturing to the oil sands dramatically summarizes one of most fundamental structural changes in Canada's economy in the past decade. Investment in the oil sands has risen from $5.2 billion in 2003 to a projected $19.7 billion in 2008. This is the largest five-year increase ever posted by any major sector (let alone individual industry) outside the oil patch, including the current surge in transportation and mining, the $9 billion hike at the peak of the manufacturing boom in 2000 and the $10 billion Y2K-related splurge by finance ending in 1999.

Oil sands investment has surpassed manufacturing because of its rapid growth, not because manufacturing has been weak. By its own standards, manufacturing investment remains at a high level.

Firms plan to spend 7% more on factories this year, mostly on productivity-enhancing machinery and equipment. This $19.6 billion vote of confidence in the future of manufacturing in Canada was the highest investment since the peak of the information and communication technology boom in 2000, and was the most of any industry outside of the energy sector. A majority of manufacturing industries (11 out of 20, up from 6 in 2007) plan to spend more, led by refiners of oil and metals and capital goods industries. The auto industry plans to retrench slightly, partly due to the winding down of work on a new factory.

While energy has become the dominant sector in business investment, metal ore mining remains the fastest growing. Since metals prices turned up in 2003, investment has closely tracked the rise in profits. With back-to-back gains of 33% in both 2007 and 2008, investment in metal ores has almost tripled since 2003. The total investment of $4.7 billion in metals is concentrated in gold, nickel and copper

mines.

Among services, only transportation planned double-digit investment growth in 2008, reflecting the growth of pipelines needed to connect the oil sands to their markets (these investments will allow pipelines to increase their capacity by one million barrels a day by 2009). Wholesale and retail trade plan modest expansions. Most other services plan little or no growth, including recreation, finance, business services, and accommodation and food. While most of these industries are not very capital intensive, this is a very muted response to growing labour shortages and the upward pressure on prices in this sector.