March 22 (Bloomberg) -- Finance Minister Jim Flaherty wants Canadian companies to invest more of their record cash holdings as a way to spur an economy held back by consumer debt, government austerity and stagnant exports.
Flaherty’s C$253 billion ($247 billion) budget announced yesterday includes C$1.4 billion in investment-tax credits and C$500 million in grants to train workers while also aiming to eliminate the deficit by 2015. Bank of Canada Governor Mark Carney is also cajoling companies into putting some of what he called their “dead money” to productive uses or pay it out in dividends.
The world’s 11th-largest economy is expanding at the slowest pace since emerging from recession in 2009. While tax credits and low interest rates kept consumers borrowing and spending in the early part of the recovery, the household debt-to-income ratio is now a record 165 percent, putting the onus on companies such as Suncor Energy Inc. to lead the expansion.
“It really boils down to exports and business investment carrying the growth mantle,” Derek Burleton, deputy chief economist at Toronto-Dominion Bank, said in an interview from Ottawa. “Canadian businesses need to step up and become more innovative and productive.”
The Bank of Canada projects housing investment will subtract 0.1 percentage point from growth this year and next, while business investment is forecast to accelerate, accounting for one-third of the country’s 2.7 percent growth in 2014.
Still, company spending will increase this year at the slowest pace since 2009, according to a Statistics Canada survey released Feb. 27. Carney said last month the “rotation” of demand from the country’s indebted households to businesses “is the fundamental challenge” for the country’s economy.
In Europe, German business confidence unexpectedly fell from a 10-month high in March as Cyprus inflamed the euro region’s debt crisis.
The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, declined to 106.7 from 107.4 in February. That’s the first drop in five months. Economists predicted a gain to 107.8, according to the median of 42 forecasts in a Bloomberg News survey. In France, industrial confidence was unchanged this month.
Canada’s stocks and dollar rose today, with the Standard & Poor’s/TSX Composite Index gaining 9.48 points, or 0.1 percent, to 12,757.35 in Toronto. The dollar strengthened 0.2 percent to C$1.0231 per U.S. dollar at 4:57 p.m. One dollar buys 97.74 U.S. cents. Bonds fell, with the 1 percent coupon bond due May 2015 down 3 cents to C$100.02, while the yield increased 2 basis points to 0.99 percent.
Flaherty’s budget aims to spur this rotation by extending tax credits for investments in factory equipment and proposing C$15,000 worker training grants. Flaherty pointed to shortages of skilled trades workers such as electricians, carpenters and engineers, saying he hopes to encourage “short-duration training” at community colleges or union training centers.
The budget also allocated C$1 billion over five years for research by aerospace and military companies such as CAE Inc., the Montreal-based maker of flight simulators, and C$92 million to help forestry companies find new markets.
The budget put factories “at the heart” of Flaherty’s growth strategy and “recognizes the importance of manufacturing and exporting for each and every Canadian,” Jayson Myers, head of the Canadian Manufacturers and Exporters advocacy group, said in a statement.
“Shifting focus to the business side is acknowledging that for the recovery to be sustained they need businesses to start to spend,” Nathan Janzen, an economist at Royal Bank of Canada, said in an interview yesterday.
Non-financial companies held a record C$600 billion of currency and deposits in the fourth quarter, up from C$434 billion in mid-2009 as the last recession ended, according to Statistics Canada. Similar U.S. companies held a record $1.79 trillion in liquid assets at the end of last year, up from $1.42 trillion in mid-2009.
Calgary-based Suncor, the country’s largest energy firm, led all Canadian companies with C$4.39 billion in cash and marketable securities, according to Bloomberg calculations. George Weston Ltd., majority owner of the Loblaw Cos. grocery-store chain, had C$3.72 billion. Twenty-three companies had cash and marketable securities worth more than C$1 billion.
Those reserves are too high, Carney has said. “The level of caution could be viewed as excessive,” he told reporters in Toronto on Aug. 22. Companies should “put money to work, and if they can’t think of what to do with it, they should give it back to their shareholders.”
Bank of Montreal chief economist Doug Porter says large company cash reserves are a reasonable reaction to recent events. “This is the byproduct of the financial crisis, one of the key lessons many learned was you don’t want to be caught short of cash,” Porter said. “We have also had huge swings in commodity prices in recent years, and to protect against that I think it’s perfectly rational to build up a somewhat bigger buffer.”
Flaherty’s budget presented yesterday projected Canada will swing to a surplus of about C$800 million in the fiscal year that begins April 2015, from a C$25.9 billion deficit in the year ending this month, by limiting program spending growth to the slowest pace since the 1990s.
Ultimately, what will get Canadian companies to invest is faster growth in the U.S., which buys three-quarters of Canada’s exports, said Toronto-Dominion’s Burleton.
“There isn’t much the government can do to get businesses to invest if they are in an uncertain market,” Burleton said. “The U.S. is a big part of that puzzle.”
To contact the reporter on this story: Greg Quinn in Ottawa at email@example.com