Corporate Canada Has Cash To Spend But COVID Is A Dampener: Report

Summary

• Canadian companies have hordes of cash but will not spend on capital outlays anytime soon.
• Corporate Canada has also accumulated more debts than the global average during the pandemic.
• The government must provide tax relaxations and infrastructural support.

Big Canadian companies have amassed large sums of money but will not spend soon because of the ongoing economic uncertainty due to the COVID-19 pandemic, say analysts at the Bank of Montreal.

Many corporate houses were facing extreme challenges to keep up with their businesses, and in this backdrop, they are more likely to wait and watch instead of going for capital outlays.

Although corporate spending can help boost the economy, they would try to hold back any such plans in the immediate future because of their precarious position to keep themselves afloat, said BMO economists Doug Porter and Sal Guatieri in a report.

But Canadian companies have also accumulated more debts than the global average. Hence, some of them would try to repay the outstanding amounts before embarking on capital outlays, they said.

According to them, the debt accumulated by corporate Canada stood at a staggering 128 per cent of the GDP, while the global average was around 100 per cent. Moreover, corporate spending has been declining since 2019 and the trend is likely to continue until the pandemic is fully under control.

The economists further opine that the government must offer tax relaxations to encourage corporate spending. And if this trend persists, it will take more time for the economy to recovery.

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What Do Figures Say?

Canadian companies may have a combined C$140 billion in their possession as the businesses remained shut for a long period in 2020. Their financial assets, mostly in currency and deposits, rose to C$206.6 billion in the first three quarters of 2020, much higher than the average recorded over the past decade. Also, they will not unleash the amount due to the continued uncertainty, they added.

Household and corporate savings act as a cushion at times of fiscal stress, but lack of avenues to spend and the continued uncertainty can prolong the recovery. Economists at the Canadian Imperial Bank of Commerce noted that the cash flow into the economy has been slow due to the lockdowns.

Porter and Guatieri further note that cash accounts of companies rose after they took loans and due to the increase in commodity prices.

But the overarching need is to boost corporate spending and investments, which would expedite economic rebound, and for that to happen, the government must provide tax relaxations and infrastructural support, they observed.