Capital Repair and Expenditures Survey (2021)

Canadian firms plan to increase capital spending in 2021

• Canadian businesses signaled their intentions to raise non-residential capital spending by 7.0% this year, following a 9.2% decline in 2020. If achieved, this year's growth would leave nominal capital spending 2.8% below its pre-pandemic (2019) levels. Construction spending is slated to rise by 7.5% (following a 6.7% drop last year), recouping all of its pandemic-induced losses. Meanwhile, machinery and equipment spending is expected to rise by 6.2% (following a 13.4% drop in 2020). As a result, spending in this category will remain 8% below its pre-pandemic levels.
• Public sector spending will lead the way (+9.3%). This follows a 5.7% increase in 2020, and reflects the sizeable federal and provincial government responses to the pandemic. Further detail will be made available as governments release their budgets in upcoming months. Private sector capital spending is expected to increase by a more modest 5.6%. While decent, this will still leave the level of capital expenditures in the private sector 12% below pre-pandemic levels.
• The sectoral composition of the gains was mixed, with 14 of the 20 industries planning to increase spending. The utilities (+16.8%) sector is expected to contribute the most to the headline increase. Elsewhere, the transportation and warehousing sector, now on a multi-year streak of strong gains, is expected to clock in a solid 7.2% in capital spending. Statistics Canada highlighted that a sizeable portion of this will be driven by higher investments in transit and ground passenger transportation (in particular, public sector transit projects) as well as pipeline transportation. After plummeting by 31.9% in 2020, expenditures in the mining, quarrying, and oil and gas extraction sector are set to rise by 5.2% this year. 
• At the other end of the spectrum, the hard-hit accommodation and food services sector is expected to see another sizeable drop (-26.6%) in spending this year, following a 29.9% decline last year. 
• Seven of the 10 provinces are expected to see an increase in capital spending this year. Ontario (+9.1%) and Quebec (+10.9%)  drive the headline increase, with spending in both provinces expected to recover above pre-pandemic levels. Following a difficult 2020, Alberta's expenditures are set to rise by 5.1%. British Columbia's businesses, which managed to avert a decline in spending during the pandemic, have signaled another decent year for capital spending (+5.7%). Capital expenditures are expected to decline in Newfoundland & Labrador (-0.2%), Nova Scotia (-1.8%), and Prince Edward Island (-10.9%). Note that the latter two provinces saw an increase in spending in 2020 despite the pandemic.

Key Implications

• Canadian businesses have once again signaled a cautiously optimistic outlook for 2021. The survey's responses reaffirm the narrative telegraphed by responses to the Bank of Canada's January Business Outlook Survey and the CFIB Small Business Barometer. The projected increase in Canada's capital expenditure plans is encouraging, but will still leave overall spending well below pre-pandemic levels. 
• The stark divergence between private and public sector investment is also a concern, but is not entirely unexpected considering the still-tentative nature of the recovery. With lingering uncertainty around the pace of vaccinations and the timing by which economic activity will fully normalize, some business investment decisions are likely being deferred to 2022 and beyond. Likewise, beneath the headline print lay significant divergences across industries that confirm the K-shaped nature of the recovery. A more broad-based recovery is not expected until the impact of the pandemic on economic activity is in the rear-view mirror. 

Disclaimer

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.