While Canada’s economy limped to a close last year, it is not a sign of worse things to come in 2013 – although growth will continue to be lacklustre for some time, finds a new report from CIBC World Markets Inc.
“Any time growth slows to a crawl, one has to worry that it wouldn’t take much to push the economy over the edge,” says Avery Shenfeld, chief economist at CIBC. “Based on admittedly slim evidence, there are reasons to believe that Q1 growth will be better.”
He points out that while employment dropped in January, hours worked are up. He also notes that auto sales look like they’ve rebounded – generally a signal of consumer confidence – and that the resolution of energy sector disruptions has resulted in an increase in oil exports to the United States through mid-February.
“So it looks like, in terms of quarterly GDP, Q4 could end up being the storm before the calm, with an improved pace ahead,” says Mr. Shenfeld.
However, he warns that challenges domestically and globally will result in only tepid improvement. CIBC’s forecast sees the economy tracking only a 1.7 per cent growth rate in 2013, a pace that will see the unemployment rate drift higher.
Mr. Shenfeld believes that the weak close to 2012 and the modest rebound ahead will keep the Bank of Canada from raising rates until third quarter of 2013, two quarters later than previously forecast. The delay in raising rates will also result in the Canadian dollar remaining below parity with the U.S. dollar until the second quarter of 2014.
“Instead of smoothly passing the growth baton from governments and households to business spending and exports, there’s been a fumble,” he says. “Housing has slowed, as has consumer borrowing, and governments face pressures to tighten belts. But businesses aren’t opening their wallets.”
While many had forecast business investment to pick up the slack in the Canadian economy, weak global growth has been holding back capital spending. The report examined the issue of whether Corporate Canada was sitting on an excess pile of cash that it should be spending on new projects.
“There is no real evidence from a macroeconomic perspective that corporations are indeed sitting on excess cash,” says CIBC Economists Benjamin Tal and Peter Buchanan. In fact, “corporations are holding cash levels that are consistent with a trend we have seen for more than two decades.”
They note that, in nominal terms, in real terms or as a share of assets, the near $600 billion of cash holdings by non-financial corporations in Canada is at record or near-record highs. However they point out that all the increase in cash since the beginning of the recession can be fully explained by growth in GDP.
In real-terms, and as a share of GDP and corporate assets, cash holdings by corporations are now only back to their pre-recession levels. While businesses have increased the share of assets they hold in cash, their relative cash position has been offset by a decline in other current assets – namely inventories and accounts receivables.
Mr. Tal and Mr. Buchanan found that the higher level of cash holdings has not come at the expense of capital spending, which at 20 per cent of GDP, is not only more than three points above its long-term average share, it is also near a record high.
“Rumours to the contrary, there is no pile-up of excess corporate cash waiting to be spent on new projects,” says Mr. Shenfeld. “And in any event, it’s not cash in the till, but product demand that justifies a new mine, a new well, or a car plant expansion. With soft prices and transport bottlenecks, the mining, oil and gas sector, which accounts for the largest slice of business investment, is poised to cut capital spending in 2013.
‘Here’s hoping that we’re right in our view that better global growth rides to the rescue come 2014, giving the lift to exports and resource prices that will be needed to spur the corporate sector on.”
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eimar13.pdf.
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