Business investment is expected to expand at a moderate pace according to the Bank of Canada
Business investment is expected to continue to provide a moderate contribution to growth over the projection horizon, taking into account the mixed effects of recent developments. Strength in spending on machinery and equipment is anticipated to continue in the near term before moderating somewhat, while the recovery of investment in non-residential structures is gradually gaining momentum (see chart below). Underlying fundamentals are strong and would support a more robust growth trajectory were it not for the effects of heightened uncertainty around trade policy and increased incentives to shift investment from Canada to the United States as a result of US tax reforms.
Elevated uncertainty around US trade policy is expected to continue to restrain growth in business investment. Although their investment intentions indicate plans to boost spending, respondents to the Business Outlook Survey are increasingly concerned about the ongoing NAFTA renegotiations and rising protectionism more generally. Greenfield foreign direct investment into Canada has declined since mid-2016, especially from Europe but also from the United States, a possible sign of the effects of the uncertainty around trade policy. Trade-policy uncertainty is expected to reduce the level of investment by about 2 per cent by the end of 2019, an additional drag of 0.5 percentage points compared with the October projection.
The US tax reforms are anticipated to reinforce these uncertainty effects and dampen investment growth further. Firms may decide to redirect some of their planned investment spending from Canada to the United States to benefit from the lower corporate taxes. The negative effects of US tax reforms on Canadian investment have been introduced in this projection and are expected to subtract 0.5 per cent from the level of investment by the end of 2019.
The projected expansion in overall business investment is taking place despite a pullback in the energy sector associated with the recent completion of several large oil sands and offshore projects. Oil and gas investment is expected to be roughly flat over 2018 and 2019. The profile has been revised down relative to the October Report based on new information from consultations with firms in the energy sector and the recent softening in oil and gas drilling activity. Despite the rise in global oil prices, firms remain cautious about new investment projects, reflecting relatively weaker prices for WCS and Canadian natural gas, as well as uncertainty around pipeline capacity and the impact of other policy changes.
Despite the uncertainty around US trade policy, the projection for investment outside the energy sector has been revised up based on stronger expected demand. Healthy fundamentals, including rising capacity pressures, widespread positive business sentiment (see chart above) and an increasing need to improve competitiveness through digital technologies, are expected to support investment.
Download the Full January 2018 Bank of Canada Monetary Policy Report.
The next scheduled date for announcing the overnight rate target is March 7, 2018. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on April 18, 2018.
About the Bank of Canada
What the Bank Does:
The Bank of Canada is the nation's central bank. Its principal role is "to promote the economic and financial welfare of Canada," as defined in the Bank of Canada Act. The Bank’s four main areas of responsibility are:
- Monetary policy: The Bank influences the supply of money circulating in the economy, using its monetary policy framework to keep inflation low and stable.
- Financial system: The Bank promotes safe, sound and efficient financial systems, within Canada and internationally, and conducts transactions in financial markets in support of these objectives.
- Currency: The Bank designs, issues and distributes Canada’s bank notes.
- Funds management: The Bank is the "fiscal agent" for the Government of Canada, managing its public debt programs and foreign exchange reserves.
Read more about how the Bank works through its core functions.
Who Runs the Bank:
The Governing Council
The Bank of Canada is led by the Governing Council, the policy-making body of the Bank, which is responsible for:
- the conduct of monetary policy
- promoting a safe and efficient financial system
- charting the strategic direction of the Bank
- The Governing Council is made up of the Governor, the Senior Deputy Governor and four Deputy Governors.
The Governing Council's main tool for implementing monetary policy is the target for the overnight rate (also known as the key policy rate). This rate is normally set on eight fixed announcement dates per year. The Council arrives at its decisions about the rate by consensus, rather than by individual votes, as is the case at some other central banks.
See who is on Governing Council and the Bank's Senior Management.
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