Eight years ago, in the midst of a sputtering recovery from the global financial crisis and Great Recession of 2008-2009, then-Bank of Canada governor Mark Carney famously called out Corporate Canada for sitting on piles of cash rather than investing to improve their businesses, create jobs and kickstart the economy.
“Dead cash,” he called it, in one of the more extraordinary public finger-waggings in Canadian central banking history.
Turns out, that was nothing. The pandemic has corporate piggybanks bulging like prize hogs at the state fair.
Canadian Imperial Bank of Commerce economist Benjamin Tal estimated in a recent report that Canada’s private-sector businesses have saved about $80-billion more during the COVID-19 crisis than they normally would have.
That’s on top of cash positions heading into the crisis that were already higher than they were when Mr. Carney issued his scolding. At the end of last year, corporate cash was equivalent to about 27 per cent of gross domestic product, versus 21 per cent in 2012. Today, thanks to the pandemic, it has swollen to about 33 per cent.
“If back then it was dead cash, now there’s much more of it,” Mr. Tal said in an interview Wednesday.
Much like the glut of household savings that I discussed in a column earlier this week, the corporate cash pile looks like an opportunity in the waiting. If invested in productive assets rather than idling in bank accounts, that money could supercharge the postpandemic recovery.
But it might be even harder to persuade companies to loosen their purse strings than it will be to sway consumers. Consider the evidence we already have from the initial stages of the recovery.
As the economy came roaring back to life after last spring’s lockdowns, consumers were quick to consume again. By July, retail sales had already exceeded their pre-COVID levels. The housing market boomed as the pent-up demand from the lockdowns, combined with highly buyer-friendly interest rates, unleashed a home-shopping spree.
Business investment, by contrast, has continued to sputter. Non-residential spending on machinery, equipment and construction – the critical business spending that propels growth and creates jobs – was down 15 per cent in the third quarter from a year earlier. That gaping hole in business investment is one of the biggest drags on economic growth this year.
As Mr. Tal points out, businesses, unlike consumers, weren’t sitting poised to spend when the lockdowns lifted. Indeed, quite the opposite. They were already in a risk-averse mood prior to the pandemic, building their cash cushions and postponing major investments. The climate of deep business uncertainties this year has, understandably, deepened that caution.
“There’s no pent-up demand, the way you had pent-up demand in the housing market,” he said.
“The key challenge here is to find ways to motivate them to invest.”
From a financial standpoint, certainly, conditions have rarely been better – especially in sectors that haven’t been particularly hard hit by the pandemic. Not only are businesses flush with cash, but the Bank of Canada has pushed interest rates to record lows in order to encourage borrowing and stimulate the recovery – something that current Bank of Canada Governor Tiff Macklem noted in a speech Tuesday, as he urged business leaders to get off their hands and invest.
“Investment in productivity-enhancing machinery and equipment is vital. So is a commitment to research and development, and to constantly train and reskill employees.” Mr. Macklem said.
“This seems an opportune time for companies to look at how they judge the rate of return on potential investments … Taking a longer-term approach to capital investment could unlock a myriad of growth opportunities,” he said.
At least so far, those interest rates have not been compelling enough to persuade businesses. It may take some sweetening of the pie by policy makers.
As the federal government prepares its stimulus spending plans over the next few months, a major focus will have to be creating incentives to bring reluctant corporate purse holders out of their holes. And from corporate Canada’s vantage point, this may be the strongest opportunity it has had in years to tell Ottawa what it needs, in terms of policy innovations, to make business investment a priority again.
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