Canadian executives are losing faith in the U.S. economy. Since the "green shoots" of last March, there has been a radical shift in expectations. More than half of Canadian executives think the U.S. is headed for the double-dip this year. Should that happen, what are the implications for Canada?
Some executives - about one in four - believe we can avoid recession even if the U.S. economy does fail. There is a sectoral divide on this question. Most executives think their industry would be dragged down by a U.S. recession, but those in the resource sector have more faith in the resilience of their business, largely due to demand from the developing world.
While most executives are still expecting Canadian economic activity to chug along at a modest pace, many have recalibrated their predictions to be more negative. The portion who think our economy is currently in decline has tripled over the past quarter. The ranks of those who think there will be a recession in Canada this year have doubled since the summer. The percentage who said they expect our economy to decline now stands at 14 per cent - a relatively small number compared with the vast majority who expect growth, but few executives predicted anything but growth back in March.
The trend line is clear: Confidence peaked in the spring and worry about the economy is on the rise again, led by a collapse in confidence about U.S. performance.
Based on expectations that the Canadian economy is gaining strength, there are some encouraging signs in what executives have planned. Few are still contemplating layoffs. Many are thinking about hiring. Most are planning capital investments and finally deploying the cash reserves they have been building up.
However, that hopeful scenario rests with what happens down south. Most executives think a U.S. recession means a Canadian recession. Most think a U.S. recession means trouble in their industry and sector - especially manufacturing and services. And, interestingly, most think a U.S. recession will bring protectionist policies from the U.S. government. That adds up to a lot of uncertainty. And Canadian executives were clear and unanimous about one thing - this uncertainty is holding back investment.
Executives are saying two things. First, the story of the Great Recession is not over. And what happens in the U.S. will tell the tale of how all of us - businesses, consumers and governments - will ultimately emerge from the damage of 2008-2009.
David Herle is principal and Alex Swann is vice-president at the Gandalf Group.