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If not now when? Canadian Businesses Should Free Up a $ 150 Billion Cash Stack to Spur Economic Growth

‘This level of cash is something we haven’t seen in a generation’

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Canadian companies should tap into their cash hoard to take advantage of optimal trading conditions, according to Benjamin Tal, deputy chief economist at CIBC World Markets Inc.

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Stable profit margins, robust growth prospects and a strong Canadian dollar offer companies an opportune time to start flexing their financial muscle and roll out their cash stack that now stands at around $ 150 billion, according to a October report. 7 report by Tal and senior economist Katherine Judge.

Some industries, such as high-tech and manufacturing, are in a unique position for investment.

“This level of cash is something we haven’t seen in a generation,” Tal said. “And what I mean is that if they don’t invest now, when are they going to invest?”

Canadian cash positions are even more favorable compared to the US, as US government income support was more targeted at households and less at businesses. As a result, corporate Canada has almost twice the amount of cash that its US counterparts have as part of their assets.

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As for the factors that can attract companies to free up cash, Tal said the continued opening of the economy can encourage investment.

Tal said the value of the Canadian dollar is another factor that could incentivize business investment, due in part to potential cost savings on imports, such as equipment and machinery.

“So as long as the loonie is relatively high, and I think it will continue to be, even anything between 75 and 80 cents would be a good opportunity for them to take advantage of that value,” Tal said. “So, I think this opportunity will be there for a few years.”

However, the strong loon will likely not last.

The Canadian dollar strengthened against the US dollar during the COVID-19 recovery only to fall earlier this year. The Canadian dollar has recovered above 80 US cents for the first time since July due to rising commodity prices, but the monetary tightening of the US Federal Reserve could cool the rally in the Canadian dollar. against the US dollar.

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Canadian companies have also experienced healthy returns, which also contributes to the current investment opportunity. This is partly due to reductions in consumer price sensitivity during the pandemic, allowing companies to go through higher production costs while avoiding effects on demand.

However, Tal said he expects consumers to become price sensitive again in the future.

The healthy profit margins experienced by Canadian companies may contribute to the currently favorable investment position, but lack of business investment has been the trend for more than a decade. After the financial crisis of 2008, there was a structural decline in the investment appetite of Canadian companies that has not recovered.

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Business investment in Canada lagged behind during COVID-19, compared to the US, which has already fully recovered relative to business investment.

But lackluster investment isn’t just a COVID-induced malaise: Non-energy business investment fell 8.1 percent in 2020 in Canada, and management consultancy Deloitte expects an increase in business investment of a paltry 1.9 percent. percent in 2021, based on a weak recovery in the first half of the year.

“This is a significantly worse performance than that experienced in the United States, where investment as a percentage of GDP is much higher. Many factors are weighing on Canadian investment, including labor availability, electricity costs, comparative taxes and relative competitiveness, ”Deloitte noted in its economic outlook in October.

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In addition, increasing public sector investment has mitigated Canada’s underinvestment. Currently, public sector investment accounts for at least 40 percent of total investment, doing much of the heavy lifting, but the private sector will have to step up soon.

“Consumers and governments are highly leveraged and that will affect their ability to constantly increase their spending,” said Craig Alexander, chief economist at Deloitte Canada in a report. “While companies are expected to increase spending in the short term and exports will increase, investment in Canada has been chronically weak and this is limiting our ability to increase our exports.”

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Underinvestment is especially evident in the machinery and equipment industry, which is six percent below its pre-pandemic level.

Explanations for the lack of investment activity run the gamut and include the relatively large contingent of small and medium-sized companies in Canada, which tend to invest less frequently than larger companies.

Other explanations include a lower cost of labor in Canada and a high degree of foreign investment. This means less investment in Canada, as multinationals generally buy assets in their home country and deploy them in Canada.

“The levels of capacity utilization are already in line with pre-pandemic norms in the industrial sector and are approaching the peak of the last cycle. The urgency of the investment is due to bottlenecks in the supply chain that will increase the waiting time of the receiving equipment, ”CIBC’s Tal wrote in his note.

“Another factor to consider is the cost of labor. These are the early days, but given the current labor shortage, current and future pressure on wages may work to increase motivation to substitute labor for capital. “

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