Weakening investment intentions spell trouble

Economic circumstances suggest that investment growth should be strengthening. Capacity utilisation is at a decade high, the unemployment rate is unusually low and wage growth is picking up. Machinery and equipment investment growth was very strong in the first quarter. According to the Bank of Canada’s latest Business Outlook Survey, however, that strength will not be sustained through the remainder of this year. The balance of companies intent on increasing investment dropped in the second quarter to a level consistent with a stagnation in investment in the second half of this year. Although we do not know for certain why firms’ investment intentions have declined, it seems pretty likely that trade uncertainty, including the future of NAFTA and potential US tariffs on autos, is the big concern. Weakening business investment growth would spell trouble for the economy, particularly at a time when residential investment seems almost certain to drop from current high levels.