BS: Canada Companies Lead Recovery as Dollar Advances
(Updates with Carney comment in ninth paragraph, current account data in 13th paragraph.)
Nov. 29 (Bloomberg) -- Canada’s largest companies increased investment to the highest this year in the third quarter, suggesting firms are using more cash and taking advantage of a strong currency to buy assets and support the economic recovery.
Capital spending by companies on the Standard & Poor’s/TSX Composite Index that have reported results in this earnings season rose 19.2 percent from a year earlier to C$27 billion ($26.5 billion), led by Suncor Energy Inc. and other oil producers, according to data compiled by Bloomberg News. The pace of increase slowed from the 30 percent year-over-year increase seen in the second quarter as pipeline companies such as Enbridge Inc. scaled back spending.
The data support predictions by the Bank of Canada and economists such as Bank of America Corp.’s Sheryl King that businesses will use more of their cash to finance capital expenditures as they seek to boost competitiveness and take advantage of a stronger Canadian dollar that makes imported machinery cheaper.
Companies that cut spending during the recession need to boost it by about 20 percent over the next two years “just to replace worn out capital,” King said in a telephone interview from Toronto. “If they want to get at all competitive they probably have to drive those numbers up even higher.”
In an Oct. 29 Bank of America Merrill Lynch report co- written with Ryan Bohren, King estimated Canadian non-financial companies had C$241 billion in cash deposits in the second quarter, about C$100 billion more than what would be considered a normal level.
Lower Capital Stock
The capital stock of businesses is C$130 billion short of where it should be given the Canadian dollar’s appreciation over the past decade, the report said. The currency has strengthened by 32 percent against the U.S. dollar on a monthly basis over the past 10 years.
The Bank of Canada said last month the recovery in business spending has been subdued, with investment through June recovering just 15 percent of the losses incurred during the recession. The bank cited an “unusual degree of uncertainty” during the global recession as a possible cause.
Still, the central bank raised its projection for investment spending for the next two years, because of companies’ efforts to improve competitiveness, strong balance sheets and favorable credit conditions. It predicted business investment will contribute 0.3 percentage point to the 3 percent growth it projects for 2010, and 0.9 percentage point to next year’s 2.3 percent expansion.
‘Productivity Gap’
“There is a big productivity gap with the United States and with a host of other countries,” Bank of Canada Governor Mark Carney said in an Oct. 23 Bloomberg interview. “There is a competitiveness imperative for a sustained program of investment.”
A chart in last month’s monetary policy report showed the central bank projects it will take 16 quarters for capital spending to reach about 95 percent of pre-recession levels. The chart shows an annualized growth rate in business investment of about 11 percent in the third quarter, and an average growth rate of about 8 percent over the next nine quarters.
That compares with the Bank of Canada’s July predictions, where a similar chart showed spending would grow at about a 5 percent pace in the third quarter and increase at roughly a 6.5 percent rate over the next nine quarters.
GDP Report
Canada’s gross domestic product report for the third quarter will be released tomorrow at 8:30 a.m. New York time, and it may show weakening in areas outside of corporate investment, such as housing and exports. Economists surveyed by Bloomberg predict Canada’s growth slowed to a 1.4 percent annualized rate in the July-September period, down from a 2 percent pace in the second quarter and less than a quarter of the 5.8 percent rate seen in the first quarter, according to the median of 21 forecasts. The central bank predicted last month a 1.6 percent growth rate in the third quarter.
Statistics Canada reported today the country’s current account deficit 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 accelerating growth in Canada’s largest trading partner. Third quarter annualized growth in the U.S. was revised higher to 2.5 percent, from an initial estimate of 2 percent and a 1.7 percent rise in the second quarter, according to figures released Nov. 23 by the U.S. Commerce Department.
Foreshadowing
Capital expenditures by the 209 companies on Toronto’s composite index that have reported since Oct. 7, the start of the current earnings season, have rebounded from a three-year low of C$18.2 billion in the second quarter of last year. Changes in the pace of capital expenditure for listed companies have foreshadowed changes in business investment growth in the national accounts 62 percent of the time since 2005, according to Bloomberg data.
The government has also taken steps to encourage investment. Finance Minister Jim Flaherty’s 2010 fiscal plan said that Canada aims to be “a tariff-free zone for manufacturers,” after tariffs were removed 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. Four are energy firms -- Suncor, Encana Corp., Talisman Energy Inc. and Imperial Oil Ltd. -- while the other, TransCanada Corp., is a pipeline company. Barrick Gold Corp. led non-energy companies in spending last quarter with C$786 million in investment, followed by BCE Inc.’s C$748 million.
Pipeline companies scaled back capital spending, with Enbridge reducing investments by 25 percent from a year earlier and expenditures by TransCanada down 17 percent, according to Bloomberg data.
--Editors: Paul Badertscher, Andrew Barden
To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net; Ilan Kolet in Ottawa at ikolet@bloomberg.net
To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
