Trade uncertainty risks extending decades of under-investment in Canada

After a mostly challenging two decades, a rebound in planned business capital expenditures in Statistics Canada’s annual 2025 CAPEX intentions survey would still leave overall real business investment (excluding price impacts on a per-worker basis) at low levels that are practically unchanged from 2005.

Relative to the survey results, the outlook is also decidedly cloudier now given tariff-related uncertainty that only intensified after the sample period had concluded in January. Investment plans have likely already been dialed back, particularly in trade-exposed sectors like manufacturing.

Overall, another round of weak investment spending risks extending Canada’s decades long productivity crunch, turning trade threats in the near-term into structural damage in the economy that can’t be easily reversed.

Canadian investment intentions still soft after accounting for trade escalation and higher prices

Statistics Canada’s annual survey on business investment intentions today showed that private businesses planned to spend 5.5% more on investment in 2025 – after a downwardly revised 0.1% increase in 2024 (relative to intentions a year ago for a 4.6% increase).

The rise in 2025 is concentrated in the goods-producing side of the economy, particularly in manufacturing (+15.5%). On the services side, accommodation and food services was the bright spot (+11.8%), but with offset coming from weaker intentions among other services industries. Public sector spending is expected to rise by 5.7%, adding to a 12.3% jump in 2024.

The caveat, however, is the fact that the survey period (September to January) largely pre-dated the escalation in international trade uncertainty in late January and February. That means the annual intentions for 2025 are likely overstated, particularly for the manufacturing sector given large exposure to international trade headwinds stemming from heavy production integration with the United States.

And it’s still worth mentioning that the survey reports nominal Investment spending, where most of the growth in the past years was driven by higher prices. Indeed, at last count in Q3 2024, the average price of business investments was up 23% since 2019, while ‘real’ investment that excludes price impacts was down 2.3% from levels a year ago and 2.2% lower than levels in pre-pandemic 2019.

Uncertainty about international trade could (again) cap Canada’s business investment spending

As much as a tick higher in planned spending in 2025 is good news, it isn’t nearly enough to reverse the slump in Canadian business investment over what has already been a (mostly) challenging two decades – spanning the 2008/09 financial crisis, the 2015 oil price collapse, the 2020 pandemic, and the 2022/23 inflation/interest rate shock.

In recent years, the level of real investment has also lagged rapid growth in population and workforce. That means real investment when measured on a per-worker basis has been outright contracting, and is back to low levels that are essentially unchanged from two decades ago.

Given that, perhaps it’s not so surprising that growth in the Canadian economy since 2019 has been almost entirely led by an increase in total hours worked, with essentially no growth coming from labour productivity. And while the current backdrop is still sufficiently weak, the uncertainty created by threat of significant tariffs is once again stalling investment plans.

Recent ambitions to reduce inter-provincial trade barriers could help to mitigate some of the downward impact. But a long timeline for changes in regulations and standards to trickle through business practices and impact investment decisions means it won’t be an immediate offset to dampened business investment sentiment in the near-term.

Investment plans in other sectors less directly exposed to trade and driven more by domestic Canadian household demand (think retail sales, personal services) have likely changed less since January. For those sectors, early signs of improvements in household consumption in late 2024 have been encouraging. But broader measures of consumer confidence also weakened sharply in February, likely also tied to tariff uncertainties.

Weak investment will reverberate to stall productivity growth in the Canadian economy down the road

Weak business investment trends among Canadian businesses are not a result of a lack of funds. In fact, businesses as a whole are still sitting on a stockpile of cash. By our count, non-financial corporations’ holding of cash and deposits was at $992 billion as of Q3 2024, or 32% of Canadian GDP, comparing to an average of 26% of GDP in pre-pandemic 2019.

Just like households who tend to save more during the onset of economic downturns for contingency reasons, rising uncertainty about the future Canadian trade backdrop also increases the risk that businesses keep holding on to their liquid asset instead of leveraging it to drive productivity-enhancing advancements.

We have argued before that weak business investment, especially relative to labour force growth is one of the main factors driving underperformance in Canadian productivity growth relative to other advanced economies. That matters because without growth in productivity, there won’t be growth in wages or in living standards among Canadian households.

This is one way that near-term trade uncertainties, outside of dampening investment decisions and GDP growth in this moment could also have further-reaching negative impact on the economy down the road. The structural underperformance in productivity growth, due to persistent under-investment basically means there will be a speed limit on how fast the Canadian economy can growth in the long run, beyond the next four years.

Claire Fan is a senior economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.

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