Canadian businesses to significantly ramp up capital investment
TORONTO, Oct. 21, 2013 /CNW/ - Corporate Canada has never been in a
better position to capitalize on a U.S. economic recovery, finds CIBC
World Markets Inc. latest Composite Indicator of Corporate Canada's
"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," says Benjamin
Tal, Deputy Chief Economist at CIBC.
Using the bank's Composite Indicator of Corporate Canada's Strength, he
finds that, while softening somewhat recently, the index is still
hovering around an all-time high and is almost a full point above its
long-term average. "That's important since the higher the level of our
index, the more responsive corporate Canada has been to a shift in U.S.
Mr. Tal notes that, on average, a one per cent change in U.S. growth has
led to a full three-percentage-point change in capital expenditures by
Canadian corporations. However, during periods of high-index readings
like we have currently, the same increase in U.S. demand has translated
into a four-percentage-point acceleration in capital spending by
"The response by Corporate Canada is directly linked not only to the
speed of the recovery south of the border, but also to its financial
position at the eve of that acceleration," he says. "Given the highly
elevated level of our index, the ability of Canadian corporations to
respond to improving U.S. demand has never been better.
"What's more, this is not a tale of one or two major industries that
biased the aggregate results. The index performance is widely based. 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."
CIBC Economics is calling for the U.S. economy to expand by 3.2 per cent
in 2014, more than double the projected pace in 2013, with the global
economy growing by four per cent next year.
Mr. Tal cites the prudent approach by corporate Canada before, during
and after the recession for its strong position. Corporate
debt-to-equity ratio is currently at an all-time low, recently falling
below pre-recession levels. Its current ratio of less than 0.9 is a
full one-and-a-half points below its long-term average.
The strong cash position held by Canadian firms is another factor
contributing to the elevated level of the index. At $5.7 trillion, it
is at a near-record high of 15 per cent relative to assets and 28 per
cent relative to credit. He notes that the trajectory of the increased
cash position is not something new but simply a continuation of a
long-term trend and in line with prior-cycle normal business practice.
"While businesses have increased the share of assets they hold in cash,
they, at the same time, reduced the share allocated to other current
assets," says Mr. Tal. "Those largely comprise account receivables and
inventories, which have been pared to less costly levels through
improved logistics, manufacturing integration and better management
information systems. We view the elevated cash position as an increase
in the relative share of a more productive asset—one that can increase
firms' accessibility to lower cost financing."
Another notable example of corporate Canada's strength is the current
level of business bankruptcies. "Regardless of how you measure it, the
number of business bankruptcies in Canada is at a record low," notes
Mr. Tal. "Only 3,150 firms declared bankruptcy during the year ending
June 2013, eight per cent below the rate seen in the same period last
year, and less than half the average level of the past twenty years.
"And despite the fact that today there are close to 30 per cent more
businesses in the Canadian economy than in the late 1980s, there are 50
per cent fewer business bankruptcies. Accordingly, at only three, the
estimated number of bankruptcies per 1,000 businesses is by far the
lowest on record."
However he notes that profit margin, while still a full two points above
its long-term average, has been trending downward in recent quarters
and at 6.5 per cent it is a full point below the level seen a year ago.
A similar trend can be seen in return-to-equity which at 10 per cent is
two points below the rate seen a year ago, but still roughly in line
with its long term average.
About the CIBC Composite Indicator of Corporate Canada's Strength
CIBC's Composite Indicator of Corporate Canada's* Strength uses nine key
macroeconomic measures to calculate the health of Canada's corporate
sector. These measures normalized with respect to their long-run
averages and standard deviations, and an unweighted average is taken.
At present the composite index is 1.4 standard deviations above its
The macro variables used to develop the indicator are:
Return on equity
Return on capital
Export diversification - Commodities
Export diversification - Countries;
Business bankruptcy rate;
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/corpcanadahealth_check13.pdf.
CIBC's wholesale banking business provides a range of integrated credit
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to clients in key financial markets in North America and around the
world. We provide innovative capital solutions and advisory expertise
across a wide range of industries as well as top-ranked research for
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SOURCE: CIBC World Markets
For further information:
Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc. at 416-956-3698, firstname.lastname@example.org; or Kevin Dove, Communications and Public Affairs at 416-980-8835, email@example.com.