Factors of Economic Recovery

Any Hope from Canadian Corporations? Don’t Hold your Breath

A decline in industrial investments (-13% since the 2013 peak), no export growth (-1% since 2014) despite a favorable exchange rate, and increasing overcapacity in office buildings (10% in 2015): from the corporate side, it is difficult to find signs of a real recovery in the Canadian economy based on the most recent indicators.

The 2015 technical recession in Canada was short-lived1, but there is a long way to go before one can talk about recovery. Who will boost future economic growth in Canada? Let’s start with corporations.

Industrial sector: marked slowdown in investment

Mineral prices started to fall in 2011, followed by oil prices in June 2014. Since minerals and hydrocarbons were the source of 70% of industrial investment on average between 2009 and 2015, the sector as a whole saw its investments decrease by 13% from the 2013 peak.

Even non-resource industrial investments have slowed, hit by the higher cost of importing equipment (impact of the Can/US exchange rate), as well as constantly diminished international growth prospects.

Industrial Capital Expenditures by Sector
$B – Canada – 2006-2015
Industrial capital expenditures by sector B$ - Canada - 2006-2015

Source: Statistics Canada. Table 029-0046 – NAICS 21-31-32-33, current dollars.

Industrial investment will definitely not spearhead an economic recovery but there is no collapse either. So far, production capacity shutdowns have remained few and far between, and investment levels in 2015 were indeed higher than the average of the last ten years2. A rebound is nevertheless highly unlikely even in the medium term: a review of the status of the largest industrial investment projects in Canada as of December 2015 suggests that almost 60% of these projects (by value) will be commissioned later than expected, if they are not suspended outright3. Some of the projects that have already been started are proceeding with construction, but the across-the-board rush for megaprojects has slowed considerably.

Disappointing exports

Exports of goods, which had begun to gain momentum in 20144 and had finally surpassed pre-2008 crisis levels, dipped slightly in 2015 (-1% since 2014)5. Non-energy exports did increase, particularly since the exchange rate began to fall in 20136, but not enough to offset the downturn in energy exports7. Meanwhile, the value of goods import continues to rise, now exceeding the value of exports (2015)8.

Commercial sector: investments on life support?

On the commercial side, the latest government data show that the best years appear to be behind us, especially for the sector’s driving forces – office buildings, shopping centres and hotels/restaurants9 – which peaked in 2008-2009. Though activity shows few signs of slowing down, partly due to irresistible interest rates and an influx of foreign buyers10, one may wonder if current investments are in fact aggravating an overcapacity situation. This is especially the case in the office buildings sector, where vacancy rates are reaching levels that have not been seen since before the financial crisis (10% in 2015)11.

So where will growth come from?

This overview of the corporate perspective is rather disappointing. Knowing that the combined value of goods and service exports and of business investment12 represents about 50% of GDP13, one might fear that economic growth might be stifled14.

Which economic agent could pick up the slack? The Consumer? The State? To be continued…


[1] Negative GDP growth in Q1 and Q2 of 2015 in terms of expenditures at market prices. The recovery in Q3 was marked by 0.6% growth. Source: Statistics Canada. Table 380-0064.
[2] Statistics Canada. Table 029-0046.
[3] “End of the Great Era of Industrial Megaprojects.” Megaprojects Outlook. E&B DATA. February 2016.
[4] See: Why Hasn’t the Falling Loonie Done More for our Exports? E&B DATA. August 2015.
[5] Statistics Canada. Table 228-0059.
[6] With an average annual growth of 10%. Growth is notably attributable to the motor vehicle and motor vehicle parts sector (20% of the value of non-energy exports in 2015), whose export levels have reached a record high for the last ten years.
[7] With an average annual decline of 14% since 2013. Statistics Canada. Table 228-0059.
[8] Statistics Canada. Table 228-0059 and Table 228-0059.
[9] These sectors comprise 67% of the value of capital expenditures for new commercial buildings in 2013. Statistics Canada. Table 029-0049.
[10] Related to acceleration of the capital outflows from China and the falling Canadian dollar.
[11] “The Canadian office market enters 2016 with vacancy rates climbing to a decade-long high following a prolonged landlord’s market.”, CBRE Research, Canada Commercial Real Estate Market Outlook, 2016.
[12] Represented by gross fixed asset formation of businesses.
[13] Since 2000. This level was mostly between 30 and 40% in the 1980s and 1990s. Statistics Canada. Table 380-0084.
[14] In addition, reduced business investment will do nothing to improve productivity.



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