Are Canadian businesses spending on new plant and equipment, spurring growth and future prosperity? Or are they unimaginatively hoarding cash? Early in August, a C.D. Howe Institute report announced that new capital investment per Canadian worker in 2012 will likely surpass other developed countries – our best performance for decades. But toward month-end, Bank of Canada Governor Mark Carney and federal Finance Minister Jim Flaherty accentuated the negative. Mr. Carney talked about “dead money” that managers at a loss for opportunities should return to shareholders.
Good – we agree that more capital investment would be better. As for getting there, though – is business over-saving really the problem?
For years, the C.D. Howe Institute has compared per-worker spending on non-residential structures and equipment in Canada and abroad using measures that adjust for different purchasing power of different currencies. For years, those comparisons were bleak. In the early 2000s, for example, our businesses invested about 6 per cent less per worker than the average across OECD countries, and more than 20 per cent less than U.S. businesses.
Since then, we’ve raised our game. As the decade progressed, our businesses closed the gap against the OECD, and cut the gap against the U.S. in half. This year, we estimated that – at more than $12,000 in new capital per worker – Canada’s tally will be 5 per cent higher than the OECD average. Last Friday’s news of 9-per cent-plus annualized growth (inflation-adjusted) in non-residential investment suggests we are on track to hit that mark.
Why are our businesses not doing still more? Partly because they have been shoring up their balance sheets post-2008. Earlier at the event where he talked about “dead money,” Mr. Carney praised Canadian banks for bolstering their capital. With the world economy slowing and a fiscal and currency crisis looming in Europe, financial and non-financial firms alike are wary of getting overextended. Businesses abroad are retrenching even more – one reason why Canadian investment is pulling ahead.
Because fewer Canadians lost their jobs during the slump and more found work afterward than their less fortunate counterparts abroad, moreover, the institute’s per-worker tally mutes Canada’s recent improvement. On the whole, Canadians – Mr. Carney and Mr. Flaherty among them – should take satisfaction that credible monetary policy and growth-friendly tax and regulatory changes seem to be moving Canada up the scale of countries where businesses want to invest, and where workers can look forward to better, higher-paying jobs.
One interpretation of Mr. Carney’s comments would be that, with healthier banks behind them, Canadian businesses don’t need to self-insure. But another, certainly more widespread, take was that he and Mr. Flaherty were dissing business – and, as spun by some – repudiating the policies that support it. Before concluding that businesses should cough up cash they’re too dumb or lazy to use, or that we should tax and spend it for them, let’s see what recent flows of saving and investment in the Canadian economy reveal about what else is happening.
Historically, Canadian businesses tended to borrow funds to cover capital investments they couldn’t finance internally. Lately, however, businesses are emitting funds. Statistics Canada’s latest figures also show that over the year to mid-2012, they not only added about $12,000 of new capital per worker, they also released about $3,500 per worker in saving. They are already distributing money – and the popping share prices of some that recently hiked their dividends show that investors like it when they do.
What is going on? Canadian households were historically net lenders. Now they are big borrowers. As individuals and families, we spent some $8,000 per worker – essentially all on residential construction – over that period. But we had only $5,500 per worker of household resources to finance it. So we borrowed a further $2,500 per worker to finance what looks a lot like a housing bubble. There’s “dead money”!
Meanwhile, the deficits of Canadian governments absorbed more than $3,500 per worker. The net result was not a glut of saving, but a shortage. To balance things, we borrowed more than $2,500 per worker from foreigners – who, by buying government bonds, raise the value of the dollar and dull the competitive edge of some businesses that might otherwise invest even more.
So yes, we could do better. But the much-touted “Canadian advantage” is already stimulating business investment: Our workers are now getting more new plant and equipment than their counterparts abroad. We don’t want businesses to save less. We want households and governments to save more.
William Robson is president and CEO of the C.D. Howe Institute.