In the continuing hand-wringing about Canada's still-bloated levels of household debt, the business-borrowing column of the national credit ledger has been getting the short shrift. While consumers have curbed their appetite for credit, the country's businesses are bellying up to the buffet – which, at this stage, could be the more important development for our national economic health.
The Bank of Canada's latest report on credit conditions shows that total household debt was up 4.2 per cent in June from a year earlier. For the past year now, the pace of growth in household debt has hovered near 18-year lows. Residential mortgage growth in June hit a 12-year low. For those still nervous about the economic risk posed by overextended consumers and housing-market excesses – and the Bank of Canada itself can still be counted among this group – this has to be a source of comfort.
But as fears of the household-debt bogeyman have moved to one of the central bank's back burners, much of the bank's focus has shifted to the persistent and worrisome lack of business investment that is hamstringing economic expansion. The country sorely needs spending from the corporate side to pick up where residential investment (i.e. housing) has gradually been leaving off. It is propitious, then, that business credit, quite unlike household credit, is in serious acceleration.
The Bank of Canada's numbers show business credit was up 7.9 per cent in June from a year earlier – just a slight retreat from May's six-year high of 8.2 per cent. Long-term debt – the kind companies typically raise to finance big-picture capital projects that will drive their long-range growth – grew at 7.2 per cent, near a 10-year high. Bond issuance was up more than 12 per cent year over year.
Admittedly, growth in business credit is not exactly the same thing as growth in business investment. Indeed, Statistics Canada reported that in the first quarter of this year, non-residential business fixed-capital investment was down 0.5 per cent from the previous quarter and 0.9 per cent from a year earlier, to the lowest level since the third quarter of 2012. One could argue that businesses are merely ramping up their long-term borrowing to lock in before the inevitable rise in interest rates arrives.
Still, with more than $600-billion in cash on Canadian corporate balance sheets, this certainly looks like a lot more than just a round of opportunistic refinancing of balance sheets; it looks more like the building of a war chest. The acceleration of business credit, at a time when balance sheets are already in the healthiest shape in years, gives corporate Canada ample ammunition for a cycle of capital investment that is long overdue.
It's noteworthy that the pace of business-credit growth accelerated significantly in the 2014 second quarter, as economic activity rebounded from an unusually harsh winter and the economy of Canada's all-important trading partner, the United States, picked up steam. Indeed, the U.S. economy looks to be in the early stages of a business-investment renaissance itself: The Federal Reserve's quarterly loan officer survey, released this week, showed growing demand for loans from all sizes of U.S. businesses, as well as easing lending conditions for business loans, just the latest evidence of corporate America's rising investment plans. If, as many experts believe, Canada's business investment will be ignited by accelerating demand from the U.S. market, then the building U.S. spending trend is yet another reason for optimism that Canada's own corporate spending upswing may finally be at hand.