According to estimates from Statistics Canada, capital expenditure by Canadian businesses fell unexpectedly in the fourth quarter. Total business investment was estimated to be 0.8% lower than the same period of the previous year, with a sharp 2.4% contraction in the machinery and equipment sector.
With global commodity prices weakening and domestic consumer demand slowing, many Canadian firms are facing falling revenues and squeezed profit margins. Consequently, corporations are prioritising cash preservation and scaling back plans for new expansion. High central bank interest rates have significantly increased the cost of borrowing, making capital projects less financially viable. Additionally, pessimistic economic forecasts have severely damaged business confidence, causing firms to delay or scrap long-term investment projects.
Extract B suggests that 'corporations are prioritising cash preservation and scaling back plans for new expansion'.
Explain two factors that are likely to cause a fall in investment spending.
222 exam-style questions on AQA A Level Economics 2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts, covering 2.2.1 The circular flow of income, 2.2.2 Aggregate demand and aggregate supply analysis, 2.2.3 The determinants of aggregate demand, 2.2.4 Aggregate demand and the level of economic activity, 2.2.5 Determinants of short-run aggregate supply, and 2.2.6 Determinants of long-run aggregate supply. Each one has a worked solution and a mark scheme showing where the marks go.