2-28-18 1:14 PM EST | Email Article
By Paul Vieira 

Business investment in Canada is expected to cool significantly in 2018, reflecting a deep pullback in the country's energy sector as heavy western Canadian crude fetches prices well below global benchmarks.

In addition, uncertainty from the renegotiation of the North American Free Trade Agreement and concerns about Canada's competitiveness after sweeping U.S. tax cuts are keeping a lid on business investment, economists have said.

Statistics Canada said Wednesday its annual survey of capital-spending plans by private- and public-sector organizations indicate a rise in business investment of just 0.8%, compared with a 3% increase in 2017. Investment by companies involved in oil-and-gas extraction is projected to decline 12% this year, the data agency said, the fourth straight annual drop.

The result underscores a slowdown under way in Canadian economic output, following a strong first half of 2017, and begins to cast doubt on how aggressive the Bank of Canada might be this year in lifting interest rates.

The Bank of Canada said in January that uncertainty associated with U.S. trade policy, and more favorable conditions created in the U.S. by the tax-code overhaul, will likely pose a drag on investment growth in Canada.

Avery Shenfeld, chief economist at CIBC World Markets, said the steep drop projected for energy investment in the Statistics Canada report reflects the discount on western Canadian heavy oil versus global benchmarks.

While global commodity prices and Canadian energy output climbed last year, pipeline-capacity constraints in Canada have limited producers' options for moving their products to new markets. As a result, the Canadian government said in its annual budget plan this week, the discount on Alberta heavy crude versus West Texas Intermediate has reached $20 a barrel in early 2018, versus an average $9.61 gap for all of 2017.

The Canadian Association for Petroleum Producers warned this week the lack of pipelines and an increasing tax and regulatory burden are "undermining" investor confidence in the Canadian resource sector.

The association's own figures indicate capital spending in the Canadian energy patch last year totaled 45 billion Canadian dollars ($35.3 billion), a decline of 19% from 2016 and a drop of nearly half from 2014. In comparison, the association added, private-sector U.S. spending on energy rose 38% in 2017.

The Statistics Canada report "leaves some early downside risk to the Bank of Canada's -- and our own -- call for business investment to add more to overall economic growth in 2018 than in 2017," said Nathan Janzen, economist at Royal Bank of Canada.

Dina Ignjatovic, economist at TD Bank, added because of uncertainties surrounding Nafta and a more competitive tax environment in the U.S., "Canadian export-oriented firms may choose to hold back investment, or direct it stateside."

Overall, total private-sector capital spending in 2018 is expected to drop 1.1%, according to the Statistics Canada survey, while public-sector investment is expected to rise 4.4%. Offsetting the decline in energy is a 6.2% jump in investment plans from Canada's factory sector, which likely reflects increased U.S. demand.

Write to Paul Vieira at paul.vieira@wsj.com


(END) Dow Jones Newswires

February 28, 2018 13:14 ET (18:14 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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