Companies Should Invest Now Despite Recession Fears
The prospect of a prolonged banking crisis, coupled with historically high interest rates, has led to considerable concern among business strategists regarding potential investment decisions. While a recession appears imminent, the argument for immediate investment, even in such uncertain times, is gaining traction. This initial installment of a three-part series explores the factors contributing to this shift in thinking.
Why Now is a Time to Invest Despite Recession Fears
The prevailing wisdom suggests that businesses should be hoarding cash during a period of heightened economic uncertainty, anticipating a recession and preparing for a downturn. However, a deeper analysis reveals compelling reasons to consider investing now. The core argument centers on several key observations. First, there has been a persistent underinvestment in the global economy since the 2008 financial crisis (GFC). Following the GFC, global growth has been, at best, lackluster. The period since 2008 has seen a significant shortfall in growth compared to historical averages. Simultaneously, the pre-GFC period witnessed a substantial increase in investment—an over-investment cycle—that had to be worked off before a new investment cycle could truly begin. The prolonged recovery following the crisis has, therefore, created a situation where investment has been artificially suppressed, leading to a misinterpretation of a permanent “new normal” of low investment.
Addressing Labour Market Imbalances
A second essential consideration is the current imbalance in the labour market. While record-low unemployment rates – particularly at a national level – might seem to support the traditional recessionary view, a closer examination reveals a more complex picture. Across many OECD nations, including Canada, there’s a higher number of employees relative to units of GDP, a pattern established since the 2008 crisis. This translates to approximately 700,000 to 800,000 excess workers, even after halving the figure, it remains a significant indicator. Businesses are desperately seeking solutions to this shortage, and this pressure is fueling the argument for increased investment. Furthermore, labour productivity has faltered in recent years. Replacing workers with robots isn’t a feasible remedy—the need for skilled labor remains a critical factor. The heightened demand for workers, combined with the challenge of productivity gains, underscores the strategic rationale for investment.
Demographic Challenges and Immigration Trends
A third critical factor is the demographic situation, specifically Canada’s immigration trends. While the influx of non-permanent residents, particularly those fleeing the war in Ukraine, has been hailed as a solution to labour shortages, relying solely on these surges is not a sustainable strategy. Canada’s immigration numbers have historically been lower, and there’s increasing competition from other high-income countries also facing population constraints. The goal of increasing annual immigration to 500,000 (a goal that has been hampered in the past) is viewed as a necessary step, but the ongoing challenge of attracting and retaining sufficient numbers of immigrants remains. It’s important to note that Canada’s attractiveness is increasing competition from other countries experiencing similar demographic challenges.
The Strategic Need for Increased Capital Contribution
Beyond these immediate market imbalances, there’s a fundamental strategic argument for investing now. Essentially, the situation presents an opportunity to address underlying structural vulnerabilities. The demand for capital – the contribution of capital to overall output – needs to be significantly increased to support both current and future economic demands. Critically, this investment isn’t simply about responding to immediate pressures; it’s about laying a foundation for sustainable growth and productivity gains. The potential for increased capital contribution generally improves productivity, a key objective for businesses.
A Call to Action for CFOs
The preceding arguments collectively suggest that the timeframe post-2008 has created a unique strategic moment—a clear reason to begin rethinking traditional approaches to capital allocation. The cautious approach advocated by conventional wisdom in the face of looming recessionary pressures needs to be reassessed. The fact that the arguments extend beyond a single paragraph demonstrates the depth of the strategic considerations at play. In short, this initial installment of the series lays the groundwork for a more proactive stance, signaling the beginning of a three-part exploration of why now is the time for companies to invest, even amidst recessionary concerns.
Moving Forward
Peter Hall, chief executive of Econosphere Inc. and a former chief economist at Export Development Canada, frames the current situation as a strategic opportunity, urging CFOs to reconsider their traditional risk aversion. The series will delve deeper into the underlying factors driving this shift in thinking, further solidifying the case for strategic investment.
