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Carney to get wish on business investment: TD

Bank of Canada Governor Mark Carney may get his wish to have businesses either put their record cash holdings to work or give it back to shareholders in the form of dividends so they can spend it.

With a strong loonie, “pent-up demand” for machinery, and corporate balance sheets looking better than they have in nearly two decades, businesses are ready to boost their investment in fixed assets, according to TD economists.

They expect investment spending to grow about eight to 10 percent per year over the next two years.

"If we compare the current standing of corporate balance sheets in the first half of 2012 to what they looked like some 20 years ago, the picture has brightened significantly," Derek Burleton, vice president and deputy chief economist at TD, says in a report. "More importantly, as some of the storm clouds overhanging the global economy dissipate, Canadian companies are expected to increase their focus on building up fixed capital assets."

He adds that "all signs" point to a pick up in capital spending.

Businesses are holding on to record amounts of cash, with cash holdings on corporate balance sheets up around 50 percent since 2007 to $567 billion at the end of the second quarter, as they try to build a buffer to against another financial crisis or economic downturn, TD says.

But Burleton adds that when the Bank of Canada starts raising interest rates – which he expects will happen in 2013 – the cost of holding on to that cash will increase, as businesses could get higher returns from investing it in fixed income.

He also believes many companies will return some of the cash to shareholders in the form of dividends.

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