Canada Topping U.S. In Real Income Gains: CIBC World Markets Inc.

Jan 28, 2011 | Corporate Member News

Massive projects on our nation’s plate to fuel growth in the years ahead

Since the start of the new millennium, Canada’s real gross national income (GNI) has risen faster than that of the U.S., finds a new report from CIBC World Markets Inc.

The report notes that GNI is a better measure than GDP of how much wealth an economy produces.

“In real GDP terms, Canada has still trailed (the U.S.),” says Avery Shenfeld, chief economist at CIBC. “But each barrel of oil or pound of copper we produce fetches more in terms of what we can import. Real gross national income, a better measure of how much we can buy with what we earn producing our output, has therefore risen faster in Canada than stateside since the turn of the century.”

While Mr. Shenfeld thinks that U.S. President Barack Obama’s tax deal to defer fiscal tightening, combined with a slight cooling of commodity prices will see America close the GNI gap a bit this year, he’s optimistic about Canada’s longer term advantage.

He notes that the U.S. will eventually face a much more painful task of deficit reduction than Canada, where tightening has already begun. Canadian federal provincial red ink peaked at roughly half of Washington’s 2010 deficit as a share of GDP. He also expects Canada to benefit as resource prices climb higher in coming years as the global economy moves closer to full employment.

“A more positive long-term view now seems to be shared by the business community, judging by recent surveys,” says Mr. Shenfeld. “Capital spending plans are picking up, and there are some massive projects on our nation’s plate to fuel growth in the years ahead.”

For the first time since 2007, the three heavy hitters of capital investment in Canada are moving in tandem and will take over as the drivers of economic growth.

The oil sands, utilities and the manufacturing sector are expected to add significantly to capacity, leading the domestic economy, not just this year but also in coming years.

“We are in the midst of another wave of capital investment in the oil sands, a revival in capital expenditures in manufacturing and the continuation of the positive trajectory in investment in the utility sector,” says Benjamin Tal, deputy chief economist at CIBC.

“Those three sectors working in tandem should be a potent trio in lifting Canadian business investment skywards as a major contributor to growth in the years ahead.”

A combination of better-than-expected profitability and a reluctance to spend has left corporate Canada with a record high cash position – both from an equity and sales perspective.

“Assuming that roughly 20 per cent of the cash available goes toward capital expenditure (the long term average), that should easily support a seven to eight per cent increase in real business investment in 2011,” adds Mr. Tal. “While the ability to spend is evident, that does not automatically translate into higher investment spending. Corporations also have to be willing to take on risks, and here, the outlook is promising. The real return on capital employed is rising and is now currently at just under six per cent – a full point above its long term average, and return on equity is approaching an enticing 11 per cent.”

Canada’s crown jewel, the energy sector, will continue to attract the largest share of this capital investment spending. It currently grabs over 15 per cent of total private business investment. And the oil sands now account for no less than 40 per cent of energy capital spending, having doubled its share in the past five years.

“With the recovery in oil prices last year, capital spending in oil sands rose by almost 40 per cent to an estimated $14 billion,” says Mr. Tal. “Given the large slate of projects in the pipeline and our forecast that oil prices will average over $100 barrel later in the current expansion, we expect cumulative capital expenditure will reach $93 billion by 2015.”

Canadian utilities are also set to embark upon an ambitious but necessary expansion of capacity, particularly in hydro-power generators. Over $40 billion worth of hydro projects are now slated over the next several years. The Conawapa and Site C developments, in Manitoba and BC respectively, once approved, will see $5-7 billion in investment apiece. Québec’s Romaine project and the Lower Churchill project in Newfoundland and Labrador are expected to be budgeted at over $6 billion apiece.

“Those four projects and a number of smaller ones will still only tap about one-third of Canada’s hydro potential,” says Mr. Tal. “That leaves substantial room for further investment in hydropower going forward, which Canada could use in its attempts to curb greenhouse gas emissions both in Canada and in potential export markets in the U.S.”

He notes that Canada’s manufacturing sector is already in a position to start expanding, with its current capacity utilization of 81 per cent, a record six points above that of the rest of the economy, and fast approaching pre-recession levels. With improving capacity use and rates of return on capital employed in the manufacturing sector approaching a 10-year high, he expects business investment in manufacturing to rise strongly in 2011.

The complete CIBC World Markets report is available at: 

CIBC’s wholesale banking business provides a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

For further information: Avery Shenfeld, Chief Economist, CIBC World Markets Inc. at (416) 594-7356, [email protected]; or Kevin Dove, Communications and Public Affairs at 416-980-8835, [email protected]

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