Canada’s economy will continue to sustain growth, albeit at a slow pace, according to a new report from CIBC World Markets.
“Any time growth slows to a crawl, one has to worry that it wouldn’t take much to push the economy over the edge,” CIBC chief economist Avery Shenfeld said in a statement. “Based on admittedly slim evidence, there are reasons to believe that Q1 growth will be better.”
Employment dropped in January, Shenfeld continued, although hours worked are up. He also noted that the resolution of energy sector disruptions has resulted in an increase in oil exports to the U.S. 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,” he said.
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.
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 2014, two quarters later than previously forecast; and that 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,” Shenfeld said. “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. “There is no real evidence from a macroeconomic perspective that corporations are indeed sitting on excess cash,” CIBC Economists Benjamin Tal and Peter Buchanan said. In fact, according to the pair, “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.
Tal and 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.