the largest companies in Canada increased investment to the top of this year's third quarter, suggesting companies are using more cash and the use of hard currency to buy assets and support economic recovery.
Capital expenditure of companies in the Standard & Poor's / TSX Composite Index that have reported results in this season earnings rose 19.2 percent from a year earlier to C $ 27 billion (26.5 billion), led by Suncor Energy Inc. and other oil producers. The pace of growth slowed from 30 per cent year-on-year increase seen in the second quarter, as pipeline companies Enbridge Inc. reduced spending.
The data support predictions by the Bank of Canada and economists such as Bank of America Corp. 's Sheryl King firms to use more of your money to fund capital expenditures in its attempt to boost competitiveness and harnessing the strengths of Canadian dollar makes imported machinery cheaper.
Companies cut spending during the recession need to increase by 20 percent over the next two years "only to replace the capital spent," King said in a telephone interview from Toronto. "If they want to reach all competitive probably have to drive the numbers up even higher."
On October 29 Bank of America Merrill Lynch report co-authored with Ryan Bohren, King estimated Canadian non-financial companies had C $ 241 billion cash deposits in the second quarter, about C $ 100 billion more than what is considered a normal level.
Low Social Capital
The corporate social capital is C $ 130 000 000 000 below where it should be given the Canadian dollar's appreciation over the last decade, the report said. The currency has strengthened 32 percent against U.S. dollar on a monthly basis over the past 10 years.
The Bank of Canada said last month the recovery in business investment has been tested with an investment recovery through June only 15 percent of the losses suffered during the recession. The bank cited an "unusual degree of uncertainty" for global recession as a possible cause.
However, the central bank raised its forecast for investment spending for the next two years due to the efforts of companies to improve competitiveness, strong balance sheets and favorable credit conditions. It provides business investment will contribute 0.3 percentage points to growth of 3 percent projected for 2010 and 0.9 percentage points to growth next year at 2.3 percent.
"Productivity gap"
"There is a big productivity gap with the United States and a number of other countries," said Bank of Canada Governor Mark Carney said in an interview Oct. 23. "There is a need for competitiveness in a sustained program of investment."
A chart in the report of the monetary policy last month showed the central bank's projects take 16 quarters for capital expenditures to reach about 95 percent of the pre-recession levels. The graph shows the annualized growth rate in business investment of about 11 percent in the third quarter, and an average growth rate of around 8 percent over the next nine quarters.
That compares with the Bank of Canada predicted in July, a similar chart showed that spending would grow by about 5 percent pace in the third quarter and increased by approximately a rate of 6.5 percent over the next nine quarters.
GDP report
Canada's gross domestic product report for the third quarter will be released tomorrow at 8:30 am New York, and can show weakness in areas outside of business investment such as housing and exports. Economists surveyed by forecast a Canadian was reduced to a rate of 1.4 percent annualized in the July-September period, compared with a rate of 2 percent in the second quarter and less than a quarter of the rate 5.8 per cent seen in the first quarter, according to the median of 21 forecasts. The central bank last month forecast a rate of 1.6 percent growth in the third quarter.
Statistics Canada reported the country's deficit on current account widened to a record C $ 17.5 billion in the third quarter as a stronger currency encouraged imports of machinery and equipment.
The slowdown contrasts with the acceleration of growth in largest trading partner of Canada. In the third quarter the annual growth in the U.S. was revised upward to 2.5 percent from an initial estimate of 2 percent and an increase of 1.7 percent in the second quarter, according to figures released Nov. 23 by the U.S. Department of Commerce ..
Omen
Capital expenditures for the 209 companies on the Toronto composite index that have reported since 07 October, the beginning of the current earnings season, has recovered from a three-year low of C $ 18,200 million in the second quarter last year. Changes in capital spending rate of listed companies have foreshadowed the changes in the growth of business investment in the national accounts for 62 percent of the time since 2005.
The government has also taken steps to encourage investment. Fiscal 2010 Plan of Finance Minister Jim Flaherty said his country hopes to be "duty-free zone for manufacturers," after the tariffs were eliminated on imports of machinery and equipment in the previous year's budget.
Five companies recorded more than C $ 1 billion in capital expenditures in the third quarter. There are four energy companies - Suncor, EnCana Corp., Talisman Energy Inc. and Imperial Oil Ltd. - while the other, TransCanada Corp., is a pipeline company. Barrick Gold Corp. led energy companies are not spending the last quarter to C $ 786 000 000 of investment, followed by BCE Inc. 's C $ 748 million.
Pipeline companies reduced capital spending, including investments Enbridge reduced by 25 percent over the previous year and expenditure by 17 percent TransCanada.
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