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While Bank of Canada governor Mark Carney is telling businesses to either spend their cash or give it back to shareholders, economists are divided on whether he's right to think higher dividends will help the economy.
Non-financial businesses in Canada currently hold around 30 percent of the country's GDP, or about $526 billion, in cash and deposits, according to research from RBC. That's nearly double the amount of cash as a percentage of GDP held by businesses back in 2000.
“The level of caution could be viewed as excessive,” Carney said at a press conference earlier this week. “Their 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.”
But not all economists say the central bank governor is on the mark in calling for business to splash the cash.
"If companies are not doing enough to drive economic growth, would investors do a better job by redeploying higher dividend payouts? We are not so sure about this," Stéfane Marion, National Bank economist, said in a note to clients.
By looking at mutual fund data, Marion says the percentage of dividend payments being reinvested has swelled to 85 percent -- sharply higher than 60 percent reported in the 1980s. He says a mix of a growing aversion to risk, taxation and the fact that an increasing chunk of financial assets are earmarked for retirement has prompted a greater reinvestment of dividends.
"At the end of the day, the firepower of higher dividend payments on the real economy may not be all that large," he says. "Animal spirit, be that of corporations or investors is being tamed by both cyclical uncertainty and strong structural undercurrents.”
But Capital Economics’ David Madani says Carney's right to urge businesses to spend. In a recent report, he estimates that if non-financial firms distributed just 5 percent of their cash assets it would be enough to boost personal disposable income by 2.5 percent.
"Assuming just half of this was spent, consumption could increase by over 1 percent," Madani argues. "Although raising dividend payouts might be interpreted negatively by markets, as far as economic activity goes, if firms aren't going to spend the funds then transferring the money to shareholders would at least get the money circulating back into the economy again."
RBC economist Craig Wright tells BNN that while some of that cash hoard is "warranted... as we go forward we hope as the uncertainty eases that some of that cash will be put to work and that will help the private sector take the lead as the public sector pulls back."