The outlook for business investment in Canada this year is “a tug of war” as a weak loonie, concerns over the aging business cycle and a mediocre commodity price forecast are pitted against low borrowing costs and a push for automation, Deloitte LLP says in a new report.
Deloitte expects the Canadian economy to expand by 1.9 per cent this year after estimated growth of 1.7 per cent in 2019. While the benchmark interest rate will remain at 1.75 per cent and rising wages could push some companies for more automation.
However, the accounting firm forecasts the Canadian dollar to remain around 75.5 U.S. cents, pushing up the cost of buying equipment that’s usually priced in U.S. dollars. Geopolitical risks remain and the oil price outlook suggests there won’t be large capital spending in the energy sector, it said.
“We expect business investment to remain relatively subdued in the coming quarters,” the Deloitte team headed by chief economist Craig Alexander said. “Initiatives to enhance productivity are required — and such actions are not in the forecast.”
Looking to the year, Deloitte said the impact of lower borrowing costs will fade and economic growth will slip to its long-run pace of 1.7 per cent, a rate that’s “materially slower than what businesses have been used to historically,” it said.
Canada’s economic growth this year will come on the back of low borrowing costs fuelling consumer spending and residential real estate growth, Deloitte said. While the Bank of Canada didn’t cut interest rates in 2019 like other major economies, international easing lowered Canadian yields and borrowing costs while helping boost stock markets and commodity prices.
“The outlook is for continued modest growth in the global and Canadian economies, with a pace a bit higher than that in 2019,” Deloitte said. Global monetary stimulus, the likelihood that a hard Brexit will be avoided and an apparent truce in the U.S.-China trade dispute are contributing to growth, the firm said.
Housing prices gained in Ontario and B.C. after stalling earlier last year after new rules made it harder to get mortgages. However, the giant leaps in the residential market as in 2017 are unlikely to return in the short term because of high household debt loads, Deloitte said. Inflation will continue to hover around the 2 per cent mark, Deloitte said.
Regionally, Ontario and the West should enjoy growth while Quebec and the Maritimes will see a slowdown, Deloitte said. Alberta’s growth should triple this year to 1.5 per cent as it leaves behind poor weather, labour strife and oil production cuts, the firm said. Manitoba and Saskatchewan will see an uptick in expansion to 1.1 per cent and 1.4 per cent, respectively, it said.
Quebec’s growth will drop to 1.5 per cent from 2 per cent last year as the economy copes with a tight labour market, weak demographics and a housing market that isn’t really benefiting from low interest rates, Deloitte said.
The housing recovery will help B.C., where growth should return to 2 per cent or more if forestry exports and Chinese demand improves, Deloitte forecast. A relatively austere provincial budget and weak export demand will restrain growth in Ontario, the firm said.
The U.S. economy should average 1.9 per cent this year, down from about 2.3 per cent in 2019 as the impact of 2018 tax cuts and interest rate decreases ripple outward, Deloitte said.
“Although political risks persist on the trade front, the U.S. economy should post solid if not booming growth.”
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