No CEO wants to say the “R” word right now.
When leaders of Canada’s largest companies stepped forward in recent weeks to announce financial results, they highlighted strong past performance, along with an uncertain outlook. If they used a word that starts with “R,” it was resilience. No chief executive officer confessed to be planning for a recession.
Yet along with their brave talk, executives at a broad swath of businesses that includes banks, retailers and railways are doomsday prepping.
A number of companies ratcheted down growth forecasts for the coming year because of a combination of inflation, rising rates and supply chain stress exacerbated by Russia’s invasion of Ukraine. Along with talking about postpandemic recovery, many CEOs began explaining how they would deal with worst-case scenarios that are far worse than what they anticipated a few short months ago.
At CIBC CM-T, for example, results were strong, with loan losses down as a percentage of the bank’s total portfolio. Head of personal and small business banking Laura Dottori-Attanasio said: “We’re feeling really good about the health of the consumer.”
However, CIBC downgraded almost all the forecasts it uses to estimate future credit losses. At the end of January, the bank projected the U.S. economy would expand by 2.5 per cent, with the bottom end of its range, a.k.a. the downside case, being growth of 1.3 per cent. In CIBC’s new estimates, released last week, U.S. GDP is projected to grow 2.1 per cent, and the downside is an anemic 0.2-per-cent expansion. That worst-case scenario borders on the economic contraction that would mark a recession.
CIBC also adopted a more pessimistic view on Canadian GDP growth, home prices and stock market performance. To explain its increasingly bleak outlook, the bank said: “The downside case forecast allows for a greater slowdown in economic activity in the near term resulting from aggressive interest rate hikes introduced to combat the current high level of inflation, and a worsening of geo-political tensions and COVID-19 lockdown measures in some countries that exacerbate supply chain issues.”
In the past, CIBC was the bank that stayed too late at the party. Its shareholders shouldered a disproportionate portion of the pain that came with previous downturns. In this economic cycle, the bank seems intent on avoiding hangovers.
Canadian Tire CTC-T CEO Greg Hicks took the same “hope for the best, plan for the worst” approach in announcing stellar financial results early this month, spurred in part by customers who borrow to buy.
There are 2.2 million people carrying Canadian Tire plastic in their wallets. Sales on the retailer’s own credit card were up 26 per cent in the latest quarter, compared to the previous year. Mr. Hicks said the credit card unit “saw growth in new accounts and receivables as Canadians spent more on travel and entertainment.”
In that quarter, Canadian Tire wrote off 4 per cent of its credit card receivables – the average outstanding balance was $2,892. That’s well below prepandemic credit loss levels, and Canadian Tire executives are determined to keep write-offs to a minimum so losses would not be compounded if the economy slows, according to analyst Irene Nattel at RBC Capital Markets. In a report, Ms. Nattel said: “Should the situation deteriorate, Canadian Tire’s risk management toolkit includes selectively shutting down specific jurisdictions to new [card] acquisitions” and reducing credit limits.
Even when CEOs are upbeat in their outlook, investors are beginning to fear the worst. At Canadian Pacific Railway, CEO Keith Creel forecasts that a bumper U.S. grain harvest and rising demand for potash, plastics and auto parts will mean a strong finish to this year. Yet institutions listened to Mr. Creel and other rail executives and came away convinced there’s trouble down the tracks in the form of a significant drop in freight traffic.
After all the railways reported results, RBC Capital Markets analyst Walter Spracklin conducted a survey of institutions that “highlights continued concern about a freight recession, with 67 per cent of investors indicating they are equally or more concerned of a freight recession post Q1, despite commentary from rail executives that demand is robust.”
Being a successful leader means being both cheerleader and cynic. Good CEOs inspire confidence – from clients and employees – while ensuring the company can survive tough times. When it comes to Canada’s economic prospects, bosses are talking optimistically, while preparing for a downturn. Do as they do, not as they say.
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