Canadian companies to boost capital spending in 2014

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Corporate Canada is expected to raise spending in 2014 to take advantage of a global economic recovery. CIBC World Markets Inc. deputy chief economist Benjamin Tal said Canadian companies are well-positioned to increase capital expenditures, particularly if the U.S. economy gets rolling.

"Two-thousand thirteen should be seen as a transition year between something bad and something better," he said in a research note to be published Monday.

Mr. Tal envisages the U.S. economy growing by 3.2 per cent next year, or more than double the projected expansion this year, and he sees ongoing gains in China and Europe. "One need not be an economist to conclude that such an environment is positive for a small open economy such as Canada," he said.

During a speech last month in Vancouver, Bank of Canada Governor Stephen Poloz said he is optimistic that an uptick in foreign demand, especially from the U.S., would soon boost business confidence and prompt companies to expand and invest. "Stronger investment means more new jobs will be created. It means more capital and better tools for workers, and of course that will increase labour productivity," he said. "It means a resumption of the natural growth in the number of firms being created and more innovation and creativity."

Research firm Capital Economics said the Bank of Canada is betting on a sustained increase in exports and business investment. But "any improvement in business investment this quarter and next is likely to prove modest, contributing sparsely to overall GDP growth," according to a recent Capital Economics research note.

Still, Mr. Tal noted that a one-percentage-point change in American economic growth has triggered an average change of three percentage points in Canadian firms' capital spending.

"Recently, business in Canada has had the ability to step up capital investment, but a lack of growth in the domestic and international economies provided little incentive to do so," he said. "While it is widely expected that stronger growth in the U.S. next year will have an upside benefit for Canada, what might surprise many is how quickly and significantly Corporate Canada will ramp up spending."

The business bankruptcy rate in Canada recently hit a record low, but Canadian corporate investment has fallen off sharply over the past six months, Mr. Tal said. "Once again, Canada is finding itself in the familiar position of what's happening elsewhere will be the key factor dictating the country's economic fortune," he said. On the plus side, CIBC's composite indicator of corporate strength is near a record-high, when measuring factors such as return on equity and debt-to-equity ratio. "If we are right, 2014 will be a year in which both the U.S. and global economies will surprise on the upside," Mr. Tal said. "Our measure of corporate strength suggests that Canadian corporations have never been in a better position to respond to the upcoming shift in U.S. demand."