The Bank of Canada’s (BoC) surprise rate cut in late January, which brought short-term rates to their lowest level since the Global Financial Crisis, seems to have potentially spurred some much-needed investment among the country’s businesses, or has it?
According to a recent report from the Royal Bank of Canada’s (RBC) economics team, Canada’s business financing rose 9.1% year over year in March, its fastest pace since October 1998.
As a collection agency with offices in Edmonton, Calgary and the GTA we are watching with keen interest the unfolding of events with respect to these phenomenon and their impact (or lack thereof) on Canadian credit markets.
The central bank has been forecasting (or perhaps merely hoping) that a lower exchange rate would help facilitate a rise in export activity for Canada’s beleaguered manufacturing sector, which in turn would lead to more business investment, new hiring, and more spending–lather, rinse, repeat.
Now, let’s get into some of the numbers.
Short-term financing, which includes bank loans, jumped 12.2% from a year ago.
And the month-over-month increase, at 25.6%, underscores just how stagnant the country’s economy was in February, when GDP experienced essentially no growth from the prior month.
Long-term financing, which accounts for more than two-thirds of total business borrowing, was up 7.9%. Bonds and debentures account for more than 40% of this category, and debt issuance compared to the prior month was brisk, up 35.6%.
With one month not constituting a trend it’s too soon to tell whether this activity will prove more than fleeting. After all, a recent survey conducted by the BoC paints a more nuanced picture with its spring Business Outlook Survey indicating that while firms acknowledged that credit conditions had eased over the most recent three-month period, their investment intentions for the coming year remained about the same as last year.
With manufacturer’s payrolls actually 1.8% lower in March than they were a year ago along with the crash in commodity prices roiling Canada’s oil and gas sector this sudden jump in business financing should in no way be read as a signal that we are now entering some type of new economic renaissance.
The writer is speculating that the increase in business financing has less to do with a pick-up in the economy and economic expansion and more to do with hungry financial institutions and bond underwriters reducing their standards (reducing credit quality) in a desperate attempt to continue feeding their insatiable appetites for income. Haven’t we seen this movie before?