The economy may show signs of turning around, but capital spending intentions remain subdued.

“Business investment is usually the last major spending component of GDP to revive after an economic downturn, and that pattern appears poised to hold true in Canada this year,” says BMO Nesbitt Burns. “Even as signs accumulate by the day of a turnaround in North American growth, Canadian businesses plan to reduce capital spending by 1.0% this year, compared with a 4.5% rise in 2001.”

BMO says that the decline in spending plans can be traced to the 29.9% plunge in operating profits over the past year, and accumulated excess capacity. “The plans are actually somewhat inflated by an expected 1.3% rise in housing – outlays for plant and equipment are projected to drop 1.6%,” it says.

BMO notes that the detailed results reveal large splits between sectors. “The massive reversal in energy prices over the past year has cut deeply into oil & gas drilling, accounting for a big chunk of the 15.1% setback in mining. A 33% decline in outlays by the airlines explains the hefty 8.9% drop in transportation. Both represent big reversals from gains in 2001. After posting the largest decline last year, capital spending by manufacturing is slated to slip another 1% this year. Areas of strength include outlays by electrical utilities (in Ontario and Quebec), and by governments.”

Another possible positive is that the survey was conducted between October and January, when sentiment was still generally depressed. So BMO suggests that there is some chance of an upward revision to capital spending plans. “Capital spending is set to decline for the first time since 1993, blunting the recovery. Even so, we still look for consumer spending and exports to push GDP higher in 2002.”