Bank of Canada Governor Mark Carney, answering questions after a speech last week, practically begged business leaders to spend more. “The level of caution could be viewed as excessive,” said Carney. “Their [business leaders’] job is to put money to work and if they can’t think of what to do with it, they should give it back to their shareholders.”
Canadian business owners, after investing at a respectable clip after the downturn in 2008, have turned cautious. This is understandable, even if it does contribute to the weakness of Canada’s economic recovery.
Business leaders can only be expected to act out of self-interest (which is to say in the interest of the business), and for that simple reason Carney’s call for increased business spending will have no real effect.
Let’s take a step back. There are three key sources of spending in an economy: government, business and consumer. When growth slows or turns negative, the role of government is to stimulate the economy with spending and monetary policy that will encourage business leaders and consumers to spend.
Remember Richard Koo’s writing about balance sheet recessions? He describes a rare situation where debt levels rise high enough among both businesses and consumers that they can’t afford to spend. This removes money from circulation, which has a negative economic impact, obviously. Monetary policy doesn’t work because the need to pay down debt outweighs the attraction of low interest rates.
Canada is not experiencing a balance sheet recession. But what may lie ahead is eerily similar.
Canadian consumers have continued to spend since 2008, in part because of the very low interest rates available to them. But that’s reaching what may be an unsustainable level. Measured as a percentage of disposable income, credit market debt hit a record 152% in Q1 this year, according to Statistics Canada. Given the threats to the global economy that persist in Europe and elsewhere, prudent Canadian consumers will shift their focus to debt reduction.
Canadian governments are in far better financial shape than their counterparts in the U.S. and other developed nations. But with interest rates as low as they are and with a full program of government spending already in place, we can’t count on Ottawa to do more.
Canadian businesses, on the other hand, are sitting on hundreds of millions of dollars. Presumably they’re waiting for a signal that the global and Canadian economies are on a sure footing. According to Statistics Canada, nonfinancial companies in this country have more than half a billion dollars sitting on the sidelines.
What would you do if you were a business leader? Would you buy equipment, not knowing if you will be able to get full value out of that investment during an extended period of slow (or worse) economic growth? If you ran a publicly traded company, would you increase your dividend to shareholders or would you build a war chest that will prevent you having to lay off workers if things get tough again?
Carney’s point is well-taken. A decision by business leaders to spend or redistribute these excess funds by way of dividend payments will stimulate the economy. But those who make that decision too early will get burned, along with all those employees and shareholders they’re responsible for.
Don’t hold your breath.