If there were ever a perfect storm for business investment in Canada it happened in the first quarter of 2009.

First, after tax corporate profits plunged by 34% year-over-year, industrial operating rates dropped to a 20+ year low, investor confidence as reflected by the S&P/TSX composite index was down by 40% year-over-year and finally, according to the latest Bank of Canada survey, 60% of the senior loan officers reported tightening lending conditions.

The impact of this tsunami caused total business
non-residential investment to fall by a record 11.3% year-over-year in real terms, primarily due to a 19% year-over-year drop in spending on machinery and equipment (M&E).

In the first quarter, machinery and equipment spending declined in every major investment category led by software which was down by 30.7% year-over-year, followed by automobiles (-28.4%), industrial machinery (-29.7%), trucks (-24.9%), and computers and other office equipment (-15.8%).

Investment in non-residential structures also fell in the first quarter (-2.1% year-over-year) due to weaker spending on non-res building projects (-5% year-over-year) and on engineering construction projects (-1% year-over-year).

Across the three categories of non-residential building, industrial building dropped the most (-13.7%) while commercial was essentially unchanged, and institutional was up by 9.3%.

Across the country, the most pronounced pull back in non-residential building has occurred in Ontario (-4.4%) primarily due to a very large, 33% drop in industrial building accompanied by a 6% decline in commercial building which was only partly offset by a 13.7% increase in institutional building. Non-res building also retreated in New Brunswick (-2.1%), in Manitoba (-0.9%) and in Quebec (-0.9%).

Despite the very hostile investment climate, non-residential building was up by 49.4% year-over-year in Newfoundland, 48.6% in Prince Edward Island, 27.6% in Saskatchewan, 3.8% in Alberta and 2.6% in British Columbia.

Looking forward, increased public sector investment in infrastructure will likely provide support to total non-residential building in the second half of this year and into 2010. Also, stronger profits, higher capacity utilization and stronger investor confidence should cause private sector investment to gain strength late in 2009 or early 2010.

Business Investment vs Corporate Profits and Investor Confidence (Stock Prices)

Data source: Statistics Canada/Chart: Reed Construction Data – CanaData.