Business investment waiting for global growth to spur demand for
TORONTO, March 4, 2013 /CNW/ - While Canada's economy limped to a close
last year, it is not a sign of worse things to come in 2013 - although
growth will continue to be lacklustre for some time, finds a new report
from CIBC World Markets Inc.
"Any time growth slows to a crawl, one has to worry that it wouldn't
take much to push the economy over the edge," says Avery Shenfeld,
chief economist at CIBC. "Based on admittedly slim evidence, there are
reasons to believe that Q1 growth will be better."
He points out that while employment dropped in January, hours worked are
up. He also notes that auto sales look like they've rebounded -
generally a signal of consumer confidence - and that the resolution of
energy sector disruptions has resulted in an increase in oil exports to
the United States through mid-February.
"So it looks like, in terms of quarterly GDP, Q4 could end up being the
storm before the calm, with an improved pace ahead," says Mr. Shenfeld.
However, he warns that challenges domestically and globally will result
in only tepid improvement. CIBC's forecast sees the economy tracking
only a 1.7 per cent growth rate in 2013, a pace that will see the
unemployment rate drift higher.
Mr. Shenfeld believes that the weak close to 2012 and the modest rebound
ahead will keep the Bank of Canada from raising rates until third
quarter of 2014, two quarters later than previously forecast. The delay
in raising rates will also result in the Canadian dollar remaining
below parity with the U.S. dollar until the second quarter of 2014.
"Instead of smoothly passing the growth baton from governments and
households to business spending and exports, there's been a fumble," he
says. "Housing has slowed, as has consumer borrowing, and governments
face pressures to tighten belts. But businesses aren't opening their
While many had forecast business investment to pick up the slack in the
Canadian economy, weak global growth has been holding back capital
spending. The report examined the issue of whether Corporate Canada was
sitting on an excess pile of cash that it should be spending on new
"There is no real evidence from a macroeconomic perspective that
corporations are indeed sitting on excess cash," says CIBC Economists
Benjamin Tal and Peter Buchanan. In fact, "corporations are holding
cash levels that are consistent with a trend we have seen for more than
They note that, in nominal terms, in real terms or as a share of assets,
the near $600 billion of cash holdings by non-financial corporations in
Canada is at record or near-record highs. However they point out that
all the increase in cash since the beginning of the recession can be
fully explained by growth in GDP.
In real-terms, and as a share of GDP and corporate assets, cash holdings
by corporations are now only back to their pre-recession levels. While
businesses have increased the share of assets they hold in cash, their
relative cash position has been offset by a decline in other current
assets - namely inventories and accounts receivables.
Mr. Tal and Mr. Buchanan found that the higher level of cash holdings
has not come at the expense of capital spending, which at 20 per cent
of GDP, is not only more than three points above its long-term average
share, it is also near a record high.
"Rumours to the contrary, there is no pile-up of excess corporate cash
waiting to be spent on new projects," says Mr. Shenfeld. "And in any
event, it's not cash in the till, but product demand that justifies a
new mine, a new well, or a car plant expansion. With soft prices and
transport bottlenecks, the mining, oil and gas sector, which accounts
for the largest slice of business investment, is poised to cut capital
spending in 2013.
'Here's hoping that we're right in our view that better global growth
rides to the rescue come 2014, giving the lift to exports and resource
prices that will be needed to spur the corporate sector on."
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eimar13.pdf.
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SOURCE: CIBC World Markets
For further information:
please contact: Avery Shenfeld, Chief Economist, at 416-594-7356, firstname.lastname@example.org; or Kevin Dove, Communications and Public Affairs at 416-980-8835, email@example.com