A new survey from KPMG Canada reveals that Canadian manufacturers are sharply pulling back on growth spending, with more than half delaying or canceling capital investments and a growing number considering moving production to the United States to shield themselves from tariff risks.
The survey of 275 manufacturers found that 57% have delayed or canceled capital spending—money typically used for new machinery, software, or factory upgrades. At the same time, 40% have already moved or are actively considering moving some production across the border. The findings paint a picture of an industry shifting from expansion mode to survival mode, with 52% of respondents saying they are now in what KPMG calls “endurance mode” and 42% scaling back research and development.
What’s Driving the Pullback?
Trade policy uncertainty is the main culprit. Tariffs—taxes on imported goods—can raise costs for manufacturers that rely on cross-border supply chains or sell into the US market. To avoid those costs, many companies are rethinking where to build their next factory or production line. While 80% of firms still expect to keep their headquarters in Canada, the survey found that 11% anticipate relocating their headquarters within five years. That small share could have an outsized impact given that manufacturing accounts for more than 10% of Canada’s economy.
The pullback in capital spending matters because it goes beyond just a line item on a balance sheet. Fewer new machines, software upgrades, and factory expansions today often mean lower productivity growth tomorrow. That can limit how fast companies can increase output without adding more workers, which in turn can drag on broader economic growth.
What It Means for Investors
For investors, the survey signals potential headwinds for Canadian industrial stocks and the broader economy. When companies cut back on capital spending and research, the effects tend to show up with a lag: weaker productivity gains, slower capacity growth, and a thinner pipeline of higher-margin products. If production also shifts south, more future revenue, hiring, and supplier spending will accrue in the US instead of Canada.
Together, these trends can chip away at medium-term earnings expectations for Canadian industrial firms. They can also keep pressure on Canada-linked assets, including the Canadian dollar, which has already been stuck near C$1.42 as interest rate differentials and mixed inflation data weigh. A weaker growth outlook relative to the US could also push longer-dated Government of Canada bond yields higher as investors demand a premium for slower expansion.
It’s worth noting that the survey results contrast with a recent Bank of Canada survey, which found that Canadian firms boosted equipment spending plans while hiring intentions slipped. The divergence may reflect that the BoC survey captures a broader range of industries, while KPMG’s focuses specifically on manufacturers, who are more exposed to trade policy shifts.
Broader Economic Context
Manufacturing is a key driver of Canada’s economy, and the survey suggests that tariff uncertainty is reshaping where future growth happens. Even if most companies keep their headquarters in Canada, the decision to place new investment in the US means that the benefits of that spending—jobs, tax revenue, and supplier contracts—will increasingly flow south. Over time, that could weigh on Canada’s productivity growth and make it harder for the economy to expand without adding more workers.
For everyday investors, the key takeaway is that the current environment of trade uncertainty is prompting Canadian manufacturers to play defense rather than offense. That could show up in weaker earnings reports from industrial companies in the coming quarters and keep the Canadian dollar under pressure relative to the US dollar. While the survey doesn’t predict a recession, it does suggest that the manufacturing sector is bracing for a prolonged period of caution.
