The most recent (Q2/2008) Bank of Canada Business Outlook Survey reinforced the view that construction activity in Canada will slow in 2008 compared to 2007.

According to the survey, the net number of private-sector firms planning to boost their spending on machinery and equipment is at its lowest level since the second quarter of 2003.

Most of the firms planning to reduce their investment plans are located in Central and Eastern Canada, while firms in the West were generally still in an expansionary mode. The reason that most firms gave to explain their weaker investment plans was a desire to build cash balances given the heightened level of uncertainty with respect to the near-term economic outlook.

The Business Outlook survey also revealed a number of other factors likely to put investment plans on hold.

In the second quarter, the net number of firms expecting their input prices to accelerate (compared to 2007 prices) hit a two-year high; The terms and conditions for obtaining financing continued to tighten over the past three months, despite two recent 25-basis-point cuts in the Bank of Canada's overnight rate.

On balance, the deterioration in the outlook for machinery and investment spending reported by the Bank of Canada is consistent with the Stats Canada survey of Public and Private Investment Intentions. That survey also reported a weakening of private-sector investment intentions in 2008.

While both private-sector and public-sector investment are likely to slow in 2008, the outlook for the latter remains relatively strong. Indeed, total public-sector capital spending, which accounts for approximately 30% of total non-residential investment, is projected to increase by 12.0% in 2008.

Private-sector spending is expected to increase by just 3.7% in the same period. Thus, while total non-residential construction is likely to cool in 2008 it appears unlikely to freeze.