What happened to the Canada advantage? For years after the great recession of 2008-09, Canadians comforted ourselves with the fact that our economy had survived the experience in better shape than most other countries, especially the United States. But the most recent survey of Canadian business leaders tells us that this sense of superiority is, decidedly, no longer the case. C Suite executives see the American economy poised to dramatically outperform ours over the next 12 months.
After five years of seeing growth – albeit slow growth – in the economy, business expectations have plunged to their lowest level since May 2009. Four in 10 Canadian executives think the country will spend the next 12 months in recession and virtually none sees strong growth . This is the culmination of declining expectations that started a year ago. Meanwhile, expectations for the U.S. economy are at a high-water mark. Almost all expect the U.S. economy to grow, and a third expect strong growth – a level we have not seen since this quarterly survey launched in 2006.
The pain is going to be concentrated in Western Canada and in the oil patch. By contrast, Ontario business sees advantages from low oil prices and expects to continue with modest growth. After years of Western Canada driving economic activity and pulling laggard Ontario behind it, most western executives see their provinces either in or heading into recession.
And there will be blood. Half of western companies have already taken some action in light of lower oil prices – they are reducing capital spending, laying off employees, or reducing employee compensation. Given that, it is not surprising that most expect a correction in the housing market this year.
This has resulted in the need for economic stimulus. Interestingly, most do not see room for the federal government to do much about it. Executives do not want the government to waver from its commitment to a balanced budget, and they are no longer expecting tax relief at either the personal or corporate level. Other than increased infrastructure spending, which is strongly supported, business is not looking to government for help.
Instead, business is looking to the Bank of Canada. Rejecting the narrow formal mandate of the central bank, executives want it to be focused on spurring economic activity. Most, especially in the resource sector, want the dollar to stay below par with the U.S. dollar, and want the bank to pursue a policy that deliberately keeps the dollar low.
Consistent with that view, many resource and manufacturing executives want the Bank of Canada to reduce interest rates even further. Some want lower rates to reduce their cost of capital. But more want lower rates to stimulate spending from already extraordinarily leveraged consumers.
David Herle is principal and Alex Swann is vice-president of The Gandalf Group