Stable profit margins, robust growth prospects and a strong loonie offer businesses an excellent moment to start flexing their financial muscle and deploy their cash pile that currently stands at around $150 billion, according to an Oct. 7 report by Tal and senior economist Katherine Judge. I apologize to you, but this video is not loaded.
Tap here to see other videos from our team. Canadian firms should unleash $150 billion cash pile to spur economic growth Some industries, such as high tech and manufacturing, are uniquely positioned for investment. This cash level is something that we haven t seen in the last generation, said Tal. When are people going to invest? Canadian cash positions are even more favourable when compared with the U.S. as U.S. government income support was more targeted to families and less towards businesses. As to what factors might entice companies to initiate cash holdings, Tal said the continued opening of the economy may encourage investment. Tal said that the value of the Canadian dollar is another factor that could incentivize business investment, due in part to potential cost savings on imports such as equipment and machinery. So as long as the Canadian currency is relatively elevated, and I think it will stay, anything between 75 and 80 U.S. cents would actually be a good opportunity for them to take advantage of that value, said Tal. I think that this opportunity will be here for a few years. Although, the strong loonie probably won t last. The loonie was strengthened against the dollar during the COVID - 19 recovery only to slip earlier this year. The Canadian dollar has rebounded on the back of higher commodity prices to above 80 US cents for the first time since July to higher currencies, but monetary tightening by the Federal Reserve could cool the loonie rally against the greenback.
In addition, Canadian businesses have experienced healthy profits, which also contributes to the current opportunity of investment. This is due in part to reduced consumers pricesensitivity during the pandemic, allowing businesses to pass through higher production costs while avoiding effects on demand. However, Tal said that he expects consumers to become more price sensitive in the future. Healthy margins experienced by Canadian companies may contribute to the currently favorable investment position, but lack of business investment has been the trend for over a decade now. Following the 2008 financial crisis, there was a structural decline in corporate Canada s investment appetite that has not rebounded.
In Canada business investment suffered during COVID - 19, compared to the U.S. which has fully recovered in relation with business investment. Wherever there was a lacklustre investment, the impact of COVID-induced malaise is not just a non-energy business investment in Canada: non-energy business investment fell by 8.1 per cent in 2020 and management consultancy Deloitte expects an increase in business investment of a paltry 1.9 per cent in 2021 based on a weak recovery in the first half of the year. This is a significantly worse performance than experienced in the United States, where investment as a share of GDP is far higher. Numerous factors are weighing on comparative investment, including the availability of labour, electricity costs, comparative taxes, and relative competitiveness, Deloitte noted in October in its economic outlook.
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It's a 'Containergeddon': Supply crisis drives Walmart and retail rivals to hire their own ships Additionally, rising public sector investment has mitigated Canada s lack of investment. Currently, private sector investment makes up at least 40 per cent of total investment, doing much of the heavy lifting, but public sector investing will have to step up soon. Consumers and governments are highly leveraged and that will impact their ability to constantly increase their spending, Craig Alexander, chief economist at Deloitte Canada said in a report. Businesses are expected to increase their spending over the near term and exports will increase, but investment in Canada has been chronically weak and this is restricting our ability to increase exports. Underinvestment is especially evident in the equipment and machinery industry, which sits at six per cent below its pre-pandemic level. Explanations for lack of investment activity run the gamut and include Canada s relatively large contingent of small and mid-sized companies, which tend to invest less frequently than larger firms. Other reasons include a high cost of labour in Canada and a lower level of foreign investment. This means fewer investments in Canada as multinationals generally deploy assets in their home nation and buy them in Canada. Capacity utilization rates are currently in line with pre-pandemic norms in the industrial sector, and are nearing last cycle peak. The urgency of investment is raised by supply chain bottlenecks that will increase the lead time of receiving equipment wrote CIBC s Tal in his note. Another factor to think about is the cost of labour. These are early days, but given the current shortage of labour it s possible that the ongoing pressure on wages could work to increase the motivation to substitute capital for labour.