MNI: Surveys Suggest BOC Right To Cut Biz Investment On NAFTA

By Yali N'Diaye

     OTTAWA (MNI) - Canadian exporters' top concern remains U.S. protectionism

and NAFTA renegotiation, with surveys and anecdotal evidence suggesting the Bank

of Canada might not have been too conservative in its judgement about the impact

of NAFTA-related uncertainty on business investment.

     In its spring Business Outlook Survey published April 9 and conducted

between February 12 and March 9, the BOC found that "most firms" have seen no

impact over the past year of U.S. policy changes or associated uncertainty.

     And over the 12 coming months, they "anticipate no clear impact."

     However, such findings look more upbeat than the BOC's own judgement. In

its April 18 Monetary Policy Report, the central bank estimated that uncertainty

related to U.S. trade policy will trim Canadian business investment level by

2.1% by the end of 2020. This was unchanged from October's assessment. 

     --BUSINESS INVESTMENT WATCH

     The Conference Board of Canada's business confidence survey published

Monday showed the index fell 6.9 points to 93.1 in the first quarter of 2018,

the lowest level in six quarters.

     "Much of the decline in the index came from significantly weaker investment

intentions and financial expectations," said the Conference Board survey.

     The share of companies estimating now is a good time to invest dropped to

34% from 52%.

     Yet, "better opportunities abroad" were among the factors holding back

expenditures, indicating that NAFTA-related concerns are indeed more of a

problem for investment than sales abroad.

     In fact, exports rebounded 3.7% in March on a 3.0% gain in volumes.

     "Exports continue to grow, that's not the problem. Investment is the

problem," Export Development Canada Chief Economist Peter Hall told MNI.

     --OIL AND GAS UNAFFECTED

     EDC, Canada's export credit agency chaired by Stephen Poloz from January

2011 until his nomination as BOC Governor in June 2013, is currently conducting

its own semi-annual survey of Canadian firms.

     While Hall could not comment on the survey's responses as they are being

collected, he told MNI that anecdotal evidence shows the top concern for

Canadian exporters is related to NAFTA and protectionism more broadly.

     For Hall, much of the responses on investment decisions depend on the state

of an industry in a post-NAFTA world.

     EDC's presumption is that if NAFTA was torn up, industries would revert to

the World Trade Organization's most favorite nation (MFN) status.

     Under such regime, he told MNI, the oil and gas industry (21% of exports to

the U.S.) would not be affected. They have no tariff now and they wouldn't have

any as a result of ending NAFTA.

     The petrochemical, mining and aerospace industries would also feel little

impact.

     Those companies "have no reason to change their investment patterns over

the next while" since they would be just as well off under a no NAFTA situation

in terms of tariffs.

     Such industries represent a "fairly large chunk of exporting business" and

will likely affect the overall business confidence nationwide, Hall added.

     --AUTO SECTOR VULNERABLE

     Yet other industries would be more exposed to damage from a termination of

NAFTA from a tariffs standpoint: the first would be the auto sector, which would

be "disproportionately affected" given the degree of integration with the U.S.  

     The three most affected sectors would be the auto manufacturing and parts

sector (15% of total exports to the U.S.), also a sticky point of the

negotiations, the computer sector, as well as agro food.

     Inside those industries, "investments are actually being put on the side,"

Hall said.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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