Business investment activity has been lagging behind Canada’s otherwise swift economic recovery. Anthony Okolie speaks with Omar Abdelrahman, Economist, TD Bank, about recent indicators that point to a rebound in the second half of 2021 and into 2022.
- Sure. So in recent quarters, Canada's growth has largely been driven by notably strong performances in residential investment, government spending and investment, and even a forceful bounce-back in consumer spending. Business investment, in contrast, has lagged. And that's not uncommon for a downturn. And in recent months, we've received some positive signals that the third quarter may be the turning point where business investment growth starts picking up and work starts contributing more to GDP growth.
- OK. What about the different investment categories? How do they compare?
- So there were some interesting divergence in the past year and a half. On the one hand, we have investments in Intellectual Property Products, IPP, things like research and development, software. That's done very well, and is basically back up even above pre-pandemic levels. Not entirely surprising, considering the move towards e-commerce and digitalization trends.
At the other end of the spectrum, we have non-residential construction, or investment in nonresidential structures, things like engineering structures, and buildings. And that's one area where, after bottoming out late last year, hasn't really picked up or seen a noticeable pick up. Again, not entirely surprising. There were some lingering uncertainties, for example, in the energy sector, brick and mortar retail, and work-from-home trends.
Somewhere in between the two is machinery and equipment investment, things like industrial equipment, transportation equipment, and aircraft. That's made some progress, but it still has a lot of lost ground to make up. Going forward, we expect all three categories to post decent growth, especially considering some of the very low levels for some of them. But we do believe that in terms of going back to pre-pandemic levels of output, the backdrop is more supportive for IPP investment and machinery and equipment.
- OK. So I want to pick up on that. Because you mentioned that you expect the pace of recovering business investment to pick up through the remainder of the year and into 2022. And you point to a couple of positive drivers. First, let's talk about business sentiment and how it's rebounding.
- Yeah, absolutely. So over the summer, and that was especially after having seen the fast ramp up in vaccinations within Canada, there was a notable pickup in business sentiment, whether it was through responses communicated in the Bank of Canada's July business outlook survey, the CFIB, small business confidence index, or even some of the purchasing managers indices, like PMIs for manufacturing for instance.
- OK, next, talk about corporate profits.
- So corporate profits are certainly one area that has rebounded faster than expected, even after controlling for government subsidies. That's, of course, notwithstanding some of the unevenness between the sectors. But overall, from a broad economy perspective, corporate profits have seen a better than expected rebound.
- OK. Let's talk about growth prospects and what we've seen from the central banks in terms of support.
- So that's one key driver is, even with growth rates potentially peaking in the US in the second quarter and Canada in the third quarter, we still expect very solid pace of growth in both countries, both for the remainder of 2021 and for 2022. So that's supportive for overall business investment intentions.
And at the same time, even with the recent signaling that Central Banks will start tightening policy soon in the US, or having already started, for example, the tapering process in Canada, interest rates are still expected to remain historically low, and accommodative for borrowing conditions.
- OK. Finally, you touched on this trend earlier. Did the acceleration into digital or digitization?
- Yeah, so that's certainly one area where we've seen responses for example, in some of the surveys, anecdotal responses suggesting that businesses intend to increase investments in these areas, especially considering some of the trends that we've seen in the past one and 1/2 year.
- What about the Delta variant concerns? Does that pose a risk to your outlook?
- So despite the cautiously optimistic outlook for business investment and overall GDP, we're cognizant that the fourth quarter of the year may be susceptible to some downside risks, especially with the recent increase in cases and the prevalence of Delta variant in Canada. Now, the situation remains fluid. There's still some uncertainty with respect to what the health policy response will be, and what the subsequent impact on consumer and business confidence will be.
On the one hand, in past waves of infection, Canada hasn't been able to tolerate as high of hospitalization rates as some other countries. And so we cannot completely rule out the possibility of some restrictions. But with this in mind, there are some positive factors that offer some respite.
And these include Canada's high vaccination rates that are ahead of many of its peers, and the recent move, for example, to mandate vaccine passes by some employers, or even by some provinces, for example. And the move towards some less restrictive tools, like mask mandates and distancing as well. So maybe we could see some regional divergences going forward because of this emerging downside risk.
- Omar, thank you very much for your time.
- Thanks a lot, Anthony. Thanks for having me.