Are Canada’s Businesses Really Hoarding Cash?

The Bank of Canada claims that Canada’s investment and import-export relationship with the United States has been dwindling over recent years. Previously, the financial institution’s governor, Stephen Poloz, said this was because of Canadian businesses holding onto their cash and refusing to invest in growth opportunities, reported Investing Daily.

But how true are these claims? Are Canadian firms effectively killing their cash?

According to a C.D. Howe report, Canadian business investment has been growing at roughly the same pace as the country’s economy since 2011. Specifically, the investment share of output is just above its 30-year average. Capital spending has also been strongest in the energy and mining sectors – these are the areas in which cash holdings have grown the most, the news source said.

“Notwithstanding concerns over rising cash on corporate balance sheets, and impatience over the pace of business investment, cash in the Canadian economy remains conspicuously alive,” policy analyst and the report’s author, Finn Poschmann, noted in the results, according to the news source.

Moreover, Poschmann explained that Canadian firms have had prudent balance sheet management since the Global Financial Crisis. According to him, cash balances increased because of the necessary shoring up of balance sheets in response to the shock from the global downturn.

In fact, Canadians were beginning to err on the side of caution over 10 years ago. Over this longer-term period, Canadian companies have “steadily trimmed the share of current assets held in relatively unproductive inventories, and similarly trimmed accounts receivable,” Poschmann said, adding that businesses “began accumulating more liquid financial assets, cash and cash-like instruments, to be deployed as investment opportunities arose.”

The numbers are certainly able to back up claims that Canada’s balance sheets are showing positive results. At the end of the first quarter, private non-financial firms had a staggering CAD630 billion (approximately USD579.8 billion) in cash idling on their balance sheets, up from CAD621 billion (approximately USD571.5 billion) at year-end, Statistics Canada reported in June.

Investing Daily also cited a Deloitte report that showed Canadian companies invest less than half of what American firms spend on research and development. However, Jayson Myers, president of Canadian Manufacturers & Exporters, told the Financial Post in June that manufacturers are “making record investments in machinery, equipment and technology and making those investments at a more rapid pace than in the United States.”

An earlier Investing Daily article also reported on how Canada’s economy was improving, according to wholesale trade data.

“Wholesale trade in this area hit an all-time high of CAD11.13 billion (approximately USD10.6 billion) last November, but June’s sales were the second-highest on record,” the news source reported. “In fact, sales in this area have risen now for three consecutive months following their first-quarter swoon. Economists project that Canada’s economy expanded by 2.6 percent during the second quarter. For full-year 2014, GDP is forecast to grow by 2.2 percent, outpacing the US economy by two-tenths of a percentage point.”

With the numbers showing economic growth for Canada, it could be that business owners are in fact being overly cautions, and are simply waiting for the perfect investment opportunity.

“Assuming the Canadian economy continues to find greater traction, then companies will eventually have the confidence to spend more on new investment, while still maintaining solid balance sheets–the best of both worlds,” Investing Daily reported.