Based on the most recent Public and Private Investment (PPI) Survey from Statistics Canada, total construction spending is projected to grow by 6.2% in 2012. This increase follows a gain of 6.9% in 2011 that was originally estimated (in the previous PPI survey) at 3.3%.
According to this most recent survey, the capital spending plans of both public and private sector organizations exhibited a solid gain in 2012.
However, in our view, the most noteworthy aspect of this survey is the acceleration in total public sector investment plans from 1.1% year-over-year in 2011 to 6.1% in 2012 at a time when governments at all levels are facing severe fiscal challenges. Having said this, a closer look at the pattern of public sector capital investment intentions across the country reveals that spending plans exhibited significant gains in only three of the 10 provinces.
By far the largest increase in public sector spending is projected in Ontario where, following a 4.2% decline in 2011, capital spending intentions in 2012 are up by 9.4% which is more than half (55.9%) of the gain projected for the country as a whole.
The two other provinces likely to see significant gains in public sector capital spending are British Columbia, with a projected increase of +11.6% in 2012 following a 12.3% gain in 2011, and Quebec where spending is projected to rise by 5.8% in 2012 following a gain of 2.9% in 2011.
Turning to the private sector, there are several reasons why it is not surprising that private sector investment intentions rose a healthy 6.2% in 2012 following an increase of 8.8% in 2011.
First, following a 5.3% quarter-over-quarter gain in Q3/2011, after tax corporate profits increased by a very solid 9.4% in the final quarter of 2011.
Second, following significant deterioration in the second quarter of the year, investor confidence in North America has strengthened significantly due in part to a gradual easing of concern about the potential impact of the European sovereign debt crisis on global financial markets, together with a steady improvement in prospects for the US economy.
Third, following a slight 0.4% decline in the second quarter, the capacity utilization rate in Canada rose by 1.8% q/q in Q3/2011 to its highest level since the third quarter 2007.
Finally, interest rates remain extremely low and as noted in the most recent (Q4/2011) Bank of Canada Senior Loan Officer Survey, there was a continued net easing in the non-prices aspects of business lending conditions in the fourth quarter (i.e., a relaxation of credit conditions).
From a regional perspective, total private sector capital spending is projected to increase in nine of the ten provinces led by Newfoundland (+30.8%), Alberta (+11.5%) and British Columbia (+9.7%). Indeed, collectively these three provinces account for 80.8% of the overall projected increase in capital spending in 2012.
Based on the survey, the only province where private sector capital is projected to shrink this year is Ontario due to a decline in planned spending on new machinery and equipment.
Across the major industrial sectors, while capital spending inten-tions increased in ten of the seventeen major industrial categories, by far the major contributor to the gain in private sector spending (72%) is the mining and oil and gas extraction industry which reported plans to increase their capital spending by 17.7% in 2012 following an 18.6% increase in 2011.
Significant increases in planned capital spending were also reported in transportation and warehousing (+21.5%), in utilities (+14.6%), manufacturing (+6.6%) and wholesale trade (+6.2%). The only two sectors reporting significantly slower capital spending in 2012 vis-à-vis 2011 were financial services (-8.3%) and real-estate services (-7%).
Private Sector 2012 Invesment Intentions -
Non-residential Construction vs Machinery and Equipment