DEAD CAPITAL

Posthaste: Canada Inc. sitting atop $140B cash mountain — but here's why it's reluctant to unleash the funds to power the economy

 


Canadian companies are sitting atop a $140-billion cash mountain, but they may be reluctant to unleash those funds to power the economy any time soon, according to Bank of Montreal.

BMO chief economist Doug Porter and senior economist Sal Guatieri estimate that Canadian non-financial corporations’ financial assets rose to $206.6 billion in the first three quarters of 2020, compared to an average $131.5 billion in the past decade.

“Much of the increase was in currency and deposits, which rose by $139.6 billion to a record high, versus an average of just $27.5 billion in the past decade,” the analysts wrote in a report on Friday. “So yes, there is plenty of extra cash on hand, but it’s largely for precautionary reasons.”

Savings by Canadian consumers and corporations have been touted as key drivers of a much-anticipated economic rebound, and is also known as a ‘pre-loaded’ fiscal stimulus.

Last November, Canadian Imperial Bank of Commerce economists estimated Canadian households had a cash hoard of $170-billion. But the cash has only slowly trickled into the economy due to continued lockdowns and lack of opportunities to spend.

BMO analysts believe that the business sector will also remain reluctant to inject funds into the economy too quickly.

Much of the cash buildup is due to a rebound in commodity prices, but also due to companies tapping loans and debt securities that would have inflated many companies’ cash accounts.

“The next question is whether they will be willing to take that step (to spend),” BMO analysts said. “Some sectors face such extreme uncertainty and/or challenging backdrops in the current environment that it is highly unlikely that there will be a significant pickup in capital outlays in highly affected industries, while many are just trying to survive.”

Companies may also be looking to pay off debts accumulated during the crisis before investing in new projects, programs and products. Canadian corporate debt currently stands at 128 per cent of GDP, compared to global average of around 100 per cent.

In addition, business capital spending has been at record lows even before the pandemic, and that’s unlikely to change amid continued economic uncertainty.

AND THE SOLUTION IS; TRICKLE DOWN ECONOMICS

The economist argue that the government will need to ease taxes to encourage companies to plough funds back into the economy.

EXPROPRIATION NOT TAX BREAKS

“The takeaway question for policymakers looking beyond the pandemic is thus: what are the more fundamental conditions that are acting as a constraint on business investment?,” Porter and Guatieri wrote. “Improve the climate in which businesses operate, say regarding taxes and infrastructure, and the spirit will follow.”

Lowering taxes may be hard for federal and provincial governments that have seen their own fiscal situation deteriorate to support the economy. They can, however, boost infrastructure in targeted areas and devise non-tax incentives to encourage Canada Inc. to unleash its cash hoard.