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Productivity not gaining
Friday, February 24, 2006
Capital investment should rise a solid 6.1 per cent in 2006, but that's not nearly enough to absorb the record profits of Corporate Canada or give a much-needed boost to private sector productivity.
Spending plans are biased heavily in favour of expanding plants — bricks and mortar — rather than investment in new machinery and equipment, according to a Statistics Canada survey of the investment intentions of companies and governments.
That's bad news for those, particularly the Bank of Canada, who had their hopes pinned on Corporate Canada improving its dismal productivity record by using its ample profits to import machinery made cheap by the high Canadian dollar.
“It's hardly the kind of response I'd hope for, given the need to retool and become more competitive,” said Derek Holt, assistant chief economist at Royal Bank of Canada. “It's hardly awe-inspiring.”
In its annual survey of what 29,000 businesses, governments and institutions intend to do with their money, Statscan found they plan to spend $207-billion on plants and equipment, up 8.2 per cent from last year. But once capital spending in the housing market is added, it brings the total capital investment rise to about 6.1 per cent.
That follows a 7.1-per-cent increase in 2005. This year's increase is worth $16-billion — the private sector accounts for about $11-billion of that, while the public sector accounts for about $5-billion.
Corporate profits, meanwhile, are expected to rise substantially this year, and companies are already sitting on a big pile of cash from double-digit profit growth in the past couple of years.
Mr. Holt estimates that there is about $80-billion in excess liquidity in Corporate Canada right now, and he projects that amount will rise by about 11 per cent this year. So the $11-billion increase in total capital spending by the private sector hardly puts a dent in the companies' cash positions.
“It looks like retained earnings are going to remain very strong, and cash levels will remain very high,” said Douglas Porter, senior economist at BMO Nesbitt Burns Inc.
Much of the extra money can't be efficiently invested, he said, because so much of the excess profits are skewed in favour of the oil and gas industry, and there are only so many good projects and investment opportunities to go around. Instead, companies with too much liquidity will likely increase their dividends to shareholders, Mr. Porter added.
Mr. Holt pointed to a more worrisome trend: Canadian companies are not doing enough to boost productivity, despite all the conditions in their favour. And boosting productivity is the only way that Canada's standard of living and overall capacity to grow can be improved.
The Statscan report shows that capital investment on structures will jump by about 7 per cent this year, while spending on productivity-enhancing machinery and equipment will rise by about 4.5 per cent.
Manufacturing is the biggest culprit, according to the Statscan report. Manufacturers plan to increase investment by 3.4 per cent this year, which is low by historical standards. And almost all of that increase will be in plant construction, leaving spending on machinery and equipment static.
“Those numbers pretty much debunk the idea that a higher dollar, by holding manufacturers' feet to the fire, will stimulate productivity-enhancing investment,” said Jim Stanford, economist for the Canadian Auto Workers. “The only productivity boost we're getting from the dollar is the composition effect: The companies surviving will tend to have higher productivity, on average, than those that get wiped out. That's a painful way to increase productivity.”
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