November 19, 2021

Weekly EconMinute—Capital investment

In this week’s EconMinute, we’re talking about Alberta’s—and Canada’s—capital investment and what it suggests for our future.

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As more and more unemployed Albertans are able to return to work, many are seeing a light at the end of the tunnel. However, one consequence of the pandemic which could have longer-term consequences for Alberta’s future growth is the slump in capital investment.

Capital investment includes spending on things like machinery, equipment, and new offices and facilities. Importantly, it represents the kind of spending that enables businesses to increase their production and meet more consumers’ needs. It therefore tends to lead to economic growth. The inverse is also true—limited investment spending tends to slow future growth.

Last year, many businesses in Alberta cut capital spending because of the uncertainty of future sales and/or limited revenue with which to invest. Overall, capital investment spending fell from about $65B in 2019 to $53B in 2020, an 18% decline. The net effect of this lower level of investment spending—combined with the reality that some assets either depreciate over time or are destroyed—means Alberta’s “capital stock” (essentially, the total amount of all capital assets in the province) fell by 0.8%.

So, what drove this decline?

  • Of little surprise, the industry which experienced the biggest decline was the oil and gas and extraction sector. As oil prices dropped to record lows, businesses limited any additional spending which would raise costs.
  • As a result, the type of capital spending which saw the biggest decline was engineering construction (e.g., physical infrastructure) and machinery and equipment.
  • However, it is worth noting that though there was a sharp COVID-related decline in 2020, there has been a longer-term decline in capital investment in Alberta since 2014.
  • While the drop was largest in Alberta, it was evident in all other oil & gas producing provinces as well.
  • These energy sector declines were large enough to drive overall capital investment across Canada down significantly from the country’s 2014 peak.
  • Further complicating matters, is that there has been little new capital investment in other industries across Canada to make up the difference.
  • Another concern is even in areas of investment which should not have been as impacted by the pandemic or the related oil price collapse—like intellectual property, for instance—there was no growth.
  • In fact, the only large province which did not see a decline—but rather a flattening—in total capital spending since 2014 was BC.

What does this mean for the future? All together, this seems to suggest slower economic growth for not just Alberta but Canada overall, in the coming years. Encouraging investment will thus be an important consideration not just for recovery—but growth—in Canada’s future.

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