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Analysis: October, 2009

Renewed enthusiasm tempered by clear limits Add to ...

For over a year now, the almost weekly releases of reports on consumer confidence, retail sales or central bank forecasts have been followed by intense debate about where the economy is going.

A year ago we were speculating how low the economy and the markets could go. Then discussion turned to how long it would take to climb out. More recent reports of GDP growth along with a rally in the markets led many to speculate again on recovery and growth.

C-level executives in our survey have reflected this renewed optimism for two straight quarters now. Six months ago, the vast majority said the economy would contract over the coming twelve months. Now virtually the opposite is true with most predicting the economy will grow.

And at no time in the last two years were executives predicting anything but decline for the U.S. economy. Now a majority says the world's largest economy will grow over the next twelve months. The turnaround in opinion is remarkable.

Are executives getting ahead of themselves? Not necessarily. Just as the Canadian economy barely crept into positive territory in June, the same can be said of Canadian business expectations.

Anticipated growth is modest, with virtually no executives expecting strong growth in the economy over the next year. And while many are optimistic about their own businesses, by no means are they back to where they were before the economic slowdown of 2008. For much of 2007, between a third and just under half of executives predicted strong growth for their companies. The number saying so now has only just climbed back to about a quarter.

So executives' opinions have shifted decisively, but they are also decisively moderate. They are camped in a cautiously optimistic space. Our survey gives them good reason to stay there.

One of the factors everybody is waiting for is the return of the consumer. In this survey we asked executives about the pension and retirement income situation facing their employees. Most agreed we are facing a pension "crisis" - people working today will not have enough to live on when they retire. Indeed most ROB 1,000 companies we spoke to do not offer a workplace pension and most executives believe the prevailing plan type, defined contribution plans, will not provide enough retirement income.

Since the business community is in no mood to be funding more generous pensions, it will be incumbent upon Canadians to save more than they have been for their retirement. Between this need for increased savings, continued high unemployment, and a huge wet blanket of personal debt over the middle and working class, business should not be looking for consumer spending to come back in force for some time.

One of the factors that drove the Canadian economy into recession was the drying up of credit. Two quarters ago the situation was desperate. In this survey, almost half said credit has become easier to access. That's certainly an improvement from two quarters ago. But for the rest, mostly western-based resource companies, credit conditions have either stayed the same or worsened in the last quarter.

Canadian business leaders are crediting Canadian government institutions with doing the right things during the recession. By far the loudest plaudits go to the Bank of Canada for lowering interest rates and keeping them there.

Fundamentally, C-Suite executives are responding to competing forces. On the one hand they believe the worst is behind us, governments have taken significant measures and markets are rallying.

On the other hand, credit conditions are thawing slowly and they know that the legacy of last year's financial meltdown - of which pensions are a part - will be with us for some time to come.

It's a big difference to see mostly positive numbers in our survey, but there's a limit to their enthusiasm. No one is breaking out the champagne just yet - especially those close to retirement.

David Herle is principal and Alex Swann is vice-president at The Gandalf Group.

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