Canadian firms are being urged to invest $150 billion to drive economic growth.
Canadian businesses have a significant opportunity to bolster economic growth, according to Benjamin Tal, deputy chief economist at CIBC World Markets Inc. His analysis, based on a recent report, indicates that firms hold approximately $150 billion in cash – a level unseen in generations. This presents a compelling case for investment, particularly given stable profit margins, robust growth prospects, and a strong Canadian dollar. The prevailing economic environment—with a loonie trading around 75 to 80 U.S. cents—further strengthens this argument. However, the long-term viability of this situation hinges on several factors.
The current situation offers Canadian businesses a rare advantage, contrasting sharply with the United States, where government support targeted households more than businesses, resulting in a lower corporate cash balance. The relative strength of the Canadian dollar—a key driver of this financial position—has allowed Canadian companies to essentially double their cash holdings as a percentage of assets compared to their U.S. counterparts. This elevated position provides a strategic advantage, particularly as Canadian businesses explore investment opportunities within sectors like high tech and manufacturing. Tal emphasizes that if firms don’t invest now, they likely won’t, highlighting the urgency of this opportunity. The ongoing economic recovery, coupled with a favorable exchange rate, creates a window for strategic deployment of capital.
Several forces are converging to create this window. The opening of the economy—particularly after pandemic-related disruptions—encourages businesses to reinvest. Additionally, the Canadian dollar’s strength offers cost savings on imports, such as equipment and machinery, thereby increasing their competitiveness. However, this advantage is not guaranteed to last as the U.S. Federal Reserve’s monetary tightening policies could eventually lead to a decline in the loonie’s value. Furthermore, the Canadian business landscape is experiencing healthy profits, largely due to consumer price sensitivity having decreased during the pandemic allowing businesses to effectively pass on elevated production costs.
Despite these promising indicators, several headwinds could impede investment. A key concern is the potential for consumer price sensitivity to return, which could dampen demand and impact business decisions. Moreover, Canada’s investment record has been historically weak, with non-energy business investment falling by 8.1 per cent in 2020—a stark contrast to the resilience demonstrated in the United States. Deloitte’s economic outlook suggests a paltry 1.9 per cent increase in business investment for 2021, indicating a slower-than-expected recovery. Factors contributing to this underperformance include labour market challenges, electricity costs, competitive taxes, and a relative decline in Canada’s economic competitiveness. This trend is particularly evident in the equipment and machinery industry, which is operating at only six per cent below its pre-pandemic level.
The challenges also include Canada’s structure: a preponderance of small and medium-sized companies, which tend to invest less frequently than larger corporations, coupled with a high degree of foreign investment. Addressing these issues will require a concerted effort. Capacity utilization levels are nearing the last cycle’s peak, intensifying the urgency for investment, particularly considering ongoing supply chain bottlenecks that are increasing lead times for equipment. Another factor is the cost of labor, which is expected to increase, potentially influencing investment decisions. Ultimately, the private sector must step up to address investment shortfalls, given the significant role public sector investment is playing—currently accounting for at least 40 per cent of total investment—and to support Canada’s long-term economic growth.
