Corporate Canada to spend more in 2014, study says

Written By Unknown on Senin, 21 Oktober 2013 | 22.39

Bay Street Toronto

Corporate Canada is set to boost capital spending next year, according to a report by CIBC World Markets. (Nathan Denette/Canadian Press)

Spending by Corporate Canada is expected to ramp up in 2014 as global economies, particularly the U.S., continue to show signs of improvement, says a report by CIBC Economics.

The study released Monday by economist Benjamin Tal says Canadian companies are holding onto a near-record amount of cash, an estimated $5.7 trillion, yet have been reluctant to invest in capital projects due to economic uncertainty.

But as some of the world's largest economies show clear signs of strength, these firms will be more willing to spend that money in 2014.

"Recently, business in Canada has had the ability to step up capital investment but a lack of growth in the domestic and international economies provided little incentive to do so," wrote Tal, the deputy chief economist at CIBC World Markets.

"While it is widely expected that stronger growth in the US next year will have an upside benefit for Canada, what might surprise many is how quickly and significantly Corporate Canada will ramp up spending to capitalize on the long awaited rebound in global demand."

He said the bank's Composite Indicator of Corporate Canada's Strength is at an all-time high, and nearly a full point above its long-term average. The index uses nine factors to measure Canadian businesses including return-on-equity, business confidence, and cash-to-credit ratios.

"Given the highly elevated level of our index, the ability of Canadian corporations to respond to improving U.S. demand has never been better," said Tal.

The bank estimates the U.S. economy will expand by 3.2 per cent next year, more than double the projected pace in 2013. While China is forecast to grow by four per cent, compared with three per cent this year.

Tal says historically, growth in the U.S. leads to more capital spending in Canada. On average, one per cent of growth south of the border translates into a three per cent change in capital expenditures by Corporate Canada, according to the study.

This change could also be seen across a majority of sectors.

"In fact, improvement in key measures such as cash position and profit margin in recent years actually appears more impressive when the mighty energy sector is excluded," he wrote.

The study also pointed to a current record-low number of bankruptcies in Canada as another indicator that businesses will be more willing to spend reserve cash. It noted that 3,150 companies declared bankruptcy in the 12-month period ending June 2013, a drop of eight per cent from a year earlier.

Despite this, the study says other factors, such as downward trend in profit margins for Canadian businesses, may discourage some.


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