Canadian executives have sharply downgraded their expectations for the North American economy, but they are in a state of watchful waiting regarding their own companies – reluctant to cut staff or take other remedial measures, but prepared to pull the trigger if necessary.
Budget battles in the United States and the potential of a meltdown in Europe have prompted a dramatic fall in confidence about the economy, according to the latest quarterly C-Suite survey of Canadian corporate executives. Two-thirds now expect the U.S. economy to decline over the next 12 months, a startling turnaround from the previous survey when only about 25 per cent expected a drop.
The executives surveyed are more positive about Canada’s economic health than the United States’ – but they are more pessimistic than in June. Now, one-quarter of executives expect our economy to shrink in the next year, compared with just 5 per cent in the past quarter.
Those concerns are not reflected in executives’ views of their own companies, however. Ninety-four per cent think their firms will grow, either moderately or strongly, in the next year, a degree of optimism that is unchanged from the last quarter.
Very few companies – about 10 per cent – are considering cutting staff this quarter. In the resource sector, two-thirds of companies are actually considering hiring new employees.
Leslie Herr, chief executive officer of Empire Life Insurance Co. in Kingston, said the level of uncertainty about the U.S. and European debt crises constitutes “a couple of big storm clouds” hanging over Canadian business, even though the effects have not yet been felt here in any significant way because of Canada’s stronger fiscal position.
Roiling markets have had some impact at Empire Life, he said, because the drop in long-term interest rates has cut into the yield of some of its investments, and its equity portfolio has taken a hit. Over all, however, “we continue to work along as though the world is fine,” he said.
Still, Mr. Herr is prepared to put the brakes on spending if “the world falls apart” and Canada feels the pain.
Big investments in core back-office computer systems could be slowed if necessary, and even halted completely if things get really bad, he said. “I’d very much not like to do that, but we are capable of doing it.” New products could also be put on hold quickly, and hiring of new staff could be nipped in the bud, he said.
While the C-Suite survey shows that companies in the resource sector are even more optimistic than those in manufacturing or services, many executives in the Alberta oil patch acknowledge the good times may not last.
“Operationally we are doing well right now [with]a lot of growth” said Trevor Spagrud, CEO of Calgary-based Hyperion Exploration Corp. “But as the economy sputters ... it is going to affect us down the road.” The rest of 2011 should be strong, he said, although 2012 is much less certain.
He is planning Hyperion’s 2012 budget and “taking a conservative stance,” particularly on spending, he said.
More than 90 per cent of the executives who responded to the survey said they would support tariff reductions and the further opening of global markets as a means to spur growth and stabilize markets. Just over half said Canada should launch its own new round of stimulus.
Peter Winkley, chief financial officer of Great Lakes bulk cargo carrier Algoma Central Corp., said he thinks the federal government “should probably be prepared to do some spending. I don’t think strict austerity ... at a time when the economy is contracting is the right answer.”
Many companies acknowledged that in the long run they are going to have to move into emerging markets if they are going to deal with future market turmoil. More than 90 per cent of those surveyed said Canadian companies must gain access to economies such as China or India in order to grow.
Still, less than 40 per cent said they have a strategy in place to tackle these markets.
In the current environment, some companies that have expanded internationally have faced setbacks.
Hammond Power Solutions Inc. , a Guelph, Ont. company that makes electrical transformers, bought a business in Italy in March, unaware the European contagion would hit that country. “It was before all of this happened,” CEO Bill Hammond said with a laugh.
While he acknowledges the new subsidiary is struggling, partly because it sells transformers to solar power companies, which have seen their subsidies cut, Mr. Hammond is confident the acquisition will eventually help his firm gain crucial market share in the huge European market. The deal has also brought the company new technology it didn’t have before.
The quarterly C-suite survey was conducted for Report on Business and Business News Network by Gandalf Group and sponsored by KPMG.
The survey interviewed 160 executives between Sept. 6 and Sept. 22, 2011. Respondents represent ROB 1,000 companies from across Canada in the manufacturing, service and resource sectors. The margin of error is 7.1 percentage points, 19 times out of 20.
Each quarter, a $1,000 charitable contribution is made on behalf of a survey participant. For the June survey, a donation was made to La Fondation PalliAmi on behalf of Christian Martineau, chief financial officer at Standard Life.
Want to know more about what Canada’s business leaders think? Watch for coverage throughout Monday on BNN.