OTTAWA (Reuters) - A rebound in Canadian business investment may signal the long-awaited shift from the consumer to the corporate side of the economy, but with trade uncertainty hanging over executives, analysts expect the strength to moderate in the months ahead.
Canada’s economy grew at its best pace in nearly six years in the second quarter amid robust consumer spending and energy exports, raising expectations another interest rate hike could come as early as next week.
Canada has emerged as the fastest growing economy of any country in the G7 group of major developed economies.
While consumers continued to prop up growth, business investment notched its second straight quarter of robust growth, signaling corporate Canada has finally turned the corner after the oil slump snuffed out confidence nearly three years ago.
“The oil patch has been badly beaten up since the middle of 2014 and finally it has bottomed. I think we’re going to see positive growth from here,” said Sherry Cooper, chief economist at Dominion Lending Centres.
Cooper expects companies to spend on machinery and equipment as employment continues to rise. With fewer workers available, businesses will have to invest to boost productivity.
While business investment shrank 11.5 percent in 2015 and 8.6 percent in 2016, it has surged about 10 percent on average over the first two quarters, Cooper said — a pace that won’t continue, but will nevertheless remain an engine of growth.
“The numbers have been extraordinary and that’s not likely to continue but I do think we will move to a move sustainable pace of about 4 percent growth in the second half of the year” and around 3 percent in 2018, Cooper said.
The restoration of business confidence is something lenders are seeing as well, with Canada’s big banks witnessing more demand for business loans in recent months.
Scotiabank’s head of Canadian banking James O’Sullivan said on Tuesday the lender is seeing the long-awaited passing of the economic baton from the consumer to the business community.
“When I see our commercial loans up 12 percent year-over-year, and I think other banks are growing their commercial loan books at healthy rates as well, I think that’s a bit of a signal that business confidence is growing and perhaps that will take a little bit of pressure off the consumer and this economy can continue to in an even more balanced way,” he said in an interview.
Still, while the recovery in the energy sector has helped boost business investment growth recently, that benefit will start to wane over the remainder of the year, said Frances Donald, senior economist at Manulife Asset Management.
Uncertainty over the renegotiation of the North American Free Trade Agreement and U.S. tax policy will also weigh on business investment over the next 6 to 12 months, Donald said.
“Once these heightened levels of uncertainty are reduced, Canada likely has a good amount of pent up investment demand from the business community,” Donald said.
Additional reporting by Leah Schnurr in Ottawa and Matt Scuffham in Toronto; Editing by Sandra Maler