Just 18% of Canadian small and mid-sized businesses plan to boost capital spending in the next two years, despite the recent decline in lending rates. That’s from a new report by the Canadian Federation of Independent Businesses (CFIB). Four in 10 plan to hold spending steady. One-third (32%) said they’ll invest less in comparison to the past two years.
“If we want to keep up with the U.S. and other G7 countries, we need businesses investing more,” said Bradlee Whidden, a senior policy analyst for Western Canada with CFIB and co-author of the report, in an interview. According to an analysis of Statistics Canada data, CFIB said business investment in machinery and equipment (M&E) declined by 16% over the last 10 years.
The report listed three main drivers: economic conditions, government policy and company viability. Among respondents to the CFIB survey, 71%, 63% and 55%, respectively, identified those as factors driving spending decision.
“Businesses want to invest,” Whidden said. “They want to grow their business. They want to be more productive.”
Still, these numbers have been declining for years. M&E spending as a percentage of GDP fell from 5.5% in 2013 to 4.2% in 2023, according to the CFIB report.
Ontario companies increased M&E spending relative to the size of their provincial economy during the decade, but they were alone among the provinces in doing so. Saskatchewan’s spend declined by 5.5 percentage points to 7.1%; Alberta’s fell 5.1 points to 7%.
Mind the gap
Carolyn Rogers, a senior deputy governor at the Bank of Canada (BoC), told a Halifax audience last year that Canadian companies have made fewer business investments than their U.S. counterparts for decades.
“You can go back 50 years and find a persistent gap between the level of capital spending per worker by Canadian firms and the level spent by their U.S. counterparts,” she said. “However, the situation has become worse over roughly the past decade. While U.S. spending continues to increase, Canadian investment levels are lower than they were a decade ago.”
The only G7 country to fall further behind U.S. companies over that same period was Italy, Rogers said.
These weakening levels of business investment contribute to falling economic productivity rates.
Rogers noted that on an hourly basis, the Canadian economy delivered 88% of the value produced by the U.S. economy in 1984. Fast forward to 2022, and that figure had sunk to 71%.
Not surprisingly, the top reasons why more businesses don’t plan to spend more all have to do with expenses. Seven in 10 (69%) noted equipment costs, 56% pointed to the cost of doing business, 50% cited cash flow constraints and 47% said borrowing costs were impacting their decision.
“Declining interest rates will definitely help… but we’ve seen other actions by governments that are going to offset that,” Whidden said. “For example, three western Canadian provinces, B.C., Saskatchewan and Manitoba, actually tax business investments in machinery and equipment through their provincial sales taxes,” he noted. It’s not something that other provinces do.
The picture improves somewhat when you include larger companies. The BoC’s most recent quarterly Business Outlook Survey found that while business investment expectations are below the study’s historical average, more respondents plan to increase rather than decrease capital spending.
Given the uncertainty facing business leaders as a result of U.S. president-elect Donald Trump’s tariff threats and an upcoming federal election here at home, the numbers could be worse.
“I think that’s a fair comment,” said Cynthia Leach, assistant chief economist, thought leadership at RBC Economics, in an interview. “It’s a trying time for businesses.”
Leach said the outlook for 2025 is more positive in the second half, as a result of lower interest rates and an anticipated improvement in consumer sentiment. “That will translate into increased business investment.”
Don’t blame business leaders, Whidden said. “Many of them have struggled to stay afloat as best they can in recent years,” he said. “They’re only doing as well as the global economic climate and government allow them to.”