Cash-rich companies have uncommon opportunity for capital investment

It’s no secret that Canadian household savings ballooned during the pandemic, and a new report from CIBC says that businesses have grown their cash piles even more, providing an exceptional opportunity to boost corporate investment.

Canadian businesses have long lagged their U.S. counterparts in terms of investment and productivity. And investment remains down in Canada relative to its pre-pandemic level, whereas U.S. business spending has fully recovered.

“However, current optimal conditions present Canadian businesses with a golden opportunity to break the chain of serial disappointments and potentially even narrow the investment gap with the U.S.,” the report said.

It noted that Canadian businesses have seen their cash holdings hit record heights during the pandemic — rising even faster than those of households.

Moreover, companies in Canada have almost twice the excess cash of their U.S. counterparts, it said.

Given these strong cash positions, combined with healthy profits in many sectors, “Canadian businesses now more than ever have the ability to undertake productivity enhancing investments,” the report said.

The need for investment is strong too, not just to close the historical gap with the U.S. but also due to the disruptions in global supply chains and labour shortages, the report noted.

If corporations put their cash hoards to work, this will support both future output and improved productivity, the report suggested.

“The positive impact will go beyond GDP du jour,” it said, as “increased investment is linked to improved productivity. It triggers the adoption and diffusion of the latest technologies which, in turn, allow workers to improve their business processes. This means companies can increase output while containing costs.”

Increased business investment could also provide a bulwark against rising inflation, the report said.

“Higher productivity, in turn, could act as insurance against the potential for increases in the cost of labour, by limiting the inflationary impact of any increase in wages,” it concluded. “In this environment, central banks can tighten policy more slowly and in a way that allows the economy to adjust gradually.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.