Canada beats U.S. in income gains

A new report from CIBC World Markets shows Canada’s gross national income (GNI) has been rising faster than that of the U.S. since the turn of the century.

GNI, the report says, is a better indicator of the amount of wealth an economy produces.

“In real GDP terms, Canada has still trailed [the U.S.]. But each barrel of oil or pound of copper we produce fetches more in terms of what we can import. Real gross national income, a better measure of how much we can buy with what we earn producing our output, has therefore risen faster in Canada than stateside since the turn of the century,” says Avery Shenfeld, chief economist at CIBC.

Shenfeld says a modest cooling in commodity prices, along with U.S. President Barack Obama’s tax deal, which deferred fiscal tightening, will help the U.S. narrow the GNI gap with Canada at least somewhat. But Shenfeld is optimistic about Canada’s advantage over the longer term.

Deficit reduction, he observes, will prove much more difficult and painful in the U.S. than in Canada, which has already begun tightening: red ink on the federal and provincial levels hit its high water mark at around half of Washington’s deficit as a share of GDP. Shenfeld also points out that Canada will benefit from higher resource prices as the global economy inches its way towards full employment in the coming years.

Full plate Pointing to recent surveys, Shenfeld notes that overall the business community in Canada is optimistic about the long term. “Capital spending plans are picking up, and there are some massive projects on our nation’s plate to fuel growth in the years ahead,” he says.

The CIBC report explains that the three heavyweights of capital investment in Canada—the oil sands, utilities and manufacturing sectors—are moving forward in lockstep for the first time since 2007, and will take over as growth drivers in the coming year and well beyond.

“We are in the midst of another wave of capital investment in the oil sands, a revival in capital expenditures in manufacturing and the continuation of the positive trajectory in investment in the utility sector. Those three sectors working in tandem should be a potent trio in lifting Canadian business investment skywards as a major contributor to growth in the years ahead,” Benjamin Tal, deputy chief economist at CIBC suggests.

Corporate Canada is sitting at record highs in terms of its cash position, thanks to a reluctance to spend and profitability exceeding expectations. And “assuming that roughly 20% of the cash available goes toward capital expenditure (the long term average), that should easily support a seven to eight percent increase in real business investment in 2011,” Tal says.

Tal adds that “while the ability to spend is evident, that does not automatically translate into higher investment spending. Corporations also have to be willing to take on risks, and here, the outlook is promising. The real return on capital employed is rising and is now currently at just under 6%—a full point above its long term average, and return on equity is approaching an enticing 11%.”

The greatest share of this capital spending will continue to be seen in the energy sector, which presently pulls in more than 15% of total private business investment. The oil sands attract almost half this sum, with the last five years seeing major increases in its share of energy capital spending.

“With the recovery in oil prices last year, capital spending in oil sands rose by almost 40% to an estimated $14 billion,” Tal explains. “Given the large slate of projects in the pipeline and our forecast that oil prices will average over $100 barrel later in the current expansion, we expect cumulative capital expenditure will reach $93 billion by 2015,” he adds.

On the utilities front, massive capacity expansions are in the works, with over $40 billion worth of hydro projects alone lined up for the next several years. Once approved, the Conawapa development in Manitoba and the Site C project in B.C. will each see between $5 billion and $7 billion in investment. Additional projects in Quebec, and Newfoundland and Labrador are expected to have budgets at over $6 billion each.

“Those four projects and a number of smaller ones will still only tap about one-third of Canada’s hydro potential,” says Tal. “That leaves substantial room for further investment in hydropower going forward, which Canada could use in its attempts to curb greenhouse gas emissions both in Canada and in potential export markets in the U.S.”

On the manufacturing sector, Tal says it’s “already in a position to start expanding, with its current capacity utilization of 81%, a record six points above that of the rest of the economy, and fast approaching pre-recession levels.”

“With improving capacity use and rates of return on capital employed in the manufacturing sector approaching a 10-year high, look for business investment in manufacturing to rise strongly in 2011. That is a significant departure from recent trends.”