Investment to rise in 2014, CIBC says

Corporate Canada encouraged by U.S. economic signs

TORONTO 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 on to 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 U.S. 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 longterm 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.

“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.