Canadian businesses will lead growth, report says
SMEs need to enhance globalization strategy to engage export practices
TORONTO—Canadian businesses are set to lead growth in the Canadian economy, according to a new report from CIBC World Markets Inc.
The report says governments, both federal and provincial, and consumers are cutting back on spending growth. But Canadian businesses will increase investments in new plants and equipment with a focus on expanding exports.
“By any measure, the current recovery in capital spending is impressive,” says Avery Shenfeld, chief economist at CIBC. “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 now above 12 per cent.”
Capital investment, the oil sands, utilities and the manufacturing sector are expected to add significantly to capacity, ensuring that business investment remains a consistent source of support for the domestic economy.
While the strong loonie is hurting exports from Canada’s manufacturing sector, Shenfeld notes the stronger currency is also playing a role in spurring investment in the sector.
“There has been a lot of discussion regarding the disappointing productivity numbers, but the reality is that we are seeing a much tighter correlation between the value of the dollar and purchases of machinery and equipment from abroad,” he says.
Capacity utilization in the manufacturing sector is now at 81 per cent, six points above the rest of the economy, and fast approaching pre-recession levels.
But, Canadian small and medium-sized enterprises (SMEs) will have to think more globally to grow.
Recent trends in SMEs’ trade activity and international comparisons suggest that Canadian SMEs have not responded to globalization in a way that optimizes their long-term growth potential and their contribution to the Canadian economy as a whole.
Only nine per cent of Canadian SMEs are engaged in exporting activity, a number that is probably overstated as it includes companies that export sporadically and not as an integral part of their business model.
It also appears that, despite globalization, the relative number of SMEs that engage in export activity in Canada is on a decline.
Currently, only an estimated three per cent of SMEs’ revenues and five per cent of jobs are directly linked to trade with emerging markets.
The report finds that strong growth in emerging markets and increased opportunities to participate in global supply chains due to the growing export focus of the U.S. economy provide Canadian SMEs with an opportunity to reverse this trend.