Businesses are sitting on record $130B in excess cash, but will they invest it coming out of the pandemic?

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Canadian businesses are sitting on a record cash pile, but whether and how they spend it may determine the shape of the post-pandemic recovery, according to a recent report from the Canadian Imperial Bank of Commerce.

In the report, CIBC deputy chief economist Benjamin Tal estimated that businesses are currently sitting on $130 billion in excess cash, a level “above and beyond” what would have been the case without the pandemic.

The report followed the bank’s November estimate that Canadian households — made frugal by lockdowns and layoffs — had accumulated more than $90 billion, in no small part thanks to federal aid programs.

“We know (households) are going to spend part of it and that is one of the reasons we expect a very strong recovery,” Tal told the Financial Post in an interview. Households are expected to lead a seven-per-cent annualized rate of growth in second half of the year, according to the report.

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“Now we look at businesses and we found that they sit on even more excess cash. So the question is whether or not this money will be spent to reverse the decline in business investment.”

Tal pointed out that businesses’ participation in Canada’s economic recovery could be limited by a couple of factors.

One major inhibitor to business investment is the federal government’s Canadian Emergency Business Account program, which provides interest-free loans of up to $40,000 and recently expanded to $60,000. More than 500,000 Canadian businesses have received CEBA support so far, which totals more than $46 billion.

Most of that money will have to be paid back, Tal said, save for $20,000 which will be considered a grant if a businesses pays the rest of the loan back by December next year.

The second inhibitor lies in which sectors performed well during the pandemic.

“Those sectors that were benefitting from the crisis, they don’t really show any significant increase in business investment intentions,” Tal said.

Technology companies and manufacturers, for example, are reluctant to invest more than normal because they anticipate their demand to go down once life returns to normal.

At the same time, sectors that suffered during the pandemic — such as oil and gas — have indicated a need to invest even though their cash reserves plummeted.

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“It’s really consistent with the narrative of this crisis, which I (describe) as deep but narrow,” Tal said.

By deep but narrow, he means the impact for sectors is “very deep” for those that experienced losses, but also narrow and limited to a few sectors compared to any other recession.

Mostafa Askari, chief economist at the Institute of Fiscal Studies and Democracy, said once macroeconomic conditions normalize, business investment will pick up. However, until then, consumers will lead the recovery because their desire to spend has been mounting over the course of numerous lockdowns.

“There has to be a view that the economy is going to grow at a healthy pace, that the COVID impact is gone and global conditions are going back to normal,” he said. “All those effects will encourage businesses to increase their investment.”