Canadian firms still wary of putting money on economic recovery

OTTAWA — Canadian businesses leaders have mixed feelings about the strength of the economy, and that is causing many to hold back on investments that could reduce unemployment and bolster the recovery, a new survey suggests.

OTTAWA — Canadian businesses leaders have mixed feelings about the strength of the economy, and that is causing many to hold back on investments that could reduce unemployment and bolster the recovery, a new survey suggests.

The latest Conference Board survey of business confidence shows executives were optimistic about prospects for the economy generally but often worried about their own operations in particular.

Despite the best six months of economic growth in years — 5.6 per cent annualized — the survey found 37 per cent concerned that their firm was operating “substantially below” capacity. That’s a high number — in normal times the number is about 15 per cent, the think-tank said.

And more than one in five said such slack was a restraint on their willingness to commit to new capital investment.

“As long as there is excess capacity, why would you build a new plant or buy new machinery?” asks Conference Board economist Pedro Antunes.

Overall, the confidence index has dropped marginally over the last two quarters, despite robust growth.

The Bank of Canada has made business investment almost an obsession of late, with governor Mark Carney urging — some would say hectoring — the corporate sector to make the investments necessary to compete in the new global economy.

Without it, he says, Canada is doomed to low productivity, low growth and a relatively lower standard of living going forward.

Corporate leaders have shot back that they are coming off one of the worst years in terms of earnings and profits in almost two decades.

In a major report released Monday, the Canadian Manufacturers and Exporters asked Ottawa to extend incentives to invest in new efficiencies now that prospects for profitability are improving.

Companies won’t invest unless they see market opportunities, said Jayson Myers of the CME.

While the global economy has improved, there is still plenty of skepticism over whether growth has been “artificial” and solely the result of government stimulus that will soon be withdrawn, Myers said.

“Nobody is going to invest in people or equipment until consumer demand is up to the point they can say, ’Yes, this is now a sustainable recovery,”’ he said.

The survey, conducted between March 8 and April 6, did show that executives were mostly upbeat about the economy generally, with two-thirds saying they expect the economy and their firm’s financial position to improve over the next six months.

But for that to translate into a robust recovery, firms must put their money where their sentiments are, say economists, and so far they are not doing so.

Another factor in that reticence to invest, the survey found, is worry about the strong Canadian dollar, particularly among manufacturers.

Although the loonie was down below 98 cents Tuesday, that is a high level historically and makes Canadian exports less competitive in global markets.

In 2009, business investment suffered the worst hit on record with a 17.4 per cent tumble, despite generous government incentives to modernize their operations to improve productivity.

That is also about the same volume drop-off that occurred in merchandise exports, as world demand for Canadian-made products bottomed out.

Export Development Canada chief economist Peter Hall said that from his conversations with business executives, he believes the stalled confidence reading represents the push and pull of two realities — for exporters in commodities such as metals and oil, the future looks bright; for exporters in manufactured goods, it looks dark.

“There’s also a sense that I pick up … that we can see it (recovery), and we don’t have far on the road to get there, but the pathway to that point is full of risks,” he said.

The list of risks run from the high dollar, sovereign debt in countries such as Greece, uncertainty over financial market reform, weak growth in the U.S. and the winding down of trillions of dollars of public stimulus.

The EDC has one of the most gloomy economic projections for this year with a growth rate of 2.5 per cent, as opposed to the Bank of Canada’s 3.7 per cent. That, in part, is because Hall believes the global economy is not sufficiently strong to support Canadian exports.

Even though exports have picked up of late, they remain 23 per cent below their pre-recession peak, and Hall believes commodities such as base metals are already over-priced and due for a correction.

Responding to a question in House on Tuesday, Finance Minister Jim Flaherty said he remains concerned about Canada’s high employment rate, which in February stood at 8.2 per cent. But he said Canada was still poised to outperform “all its competitors” in the G7.