The doom & gloom continues with some spectacularly sensational headlines from some of the nation’s most reputable news media, including the Globe & Mail and the CBC. It has become bad enough that it made us think about the issues at hand and how truly confusing it all is. Since small businesses form the backbone of any economy, we focused on big headline issues and what they mean for Alberta’s small businesses.
The presentation looks at Alberta’s main money generating industry, the oilsands, and what its sudden cooling means for small business in the province. It includes strategic concepts and suggested actions for navigating the slowdown. Bear in mind, these are generic concepts and are dependent upon your specific business situation, needs, business model, available resources, and other impactful variables.
The PowerPoint presentation has been converted to PDF for your convenience.
Get the report by clicking here.
Link
— Michael Hogan
Since completing the last report, BMO’s Senior Economist, Sal Guatieri took questions regarding the economic situation on the Globe and Mail website on Thursday, November 20.
Here are some of the more salient points from that session:
• … deflation and surging inflation are fairly low probability events, given that our central bank is targeting 2 per cent inflation and has all the means to achieve its target.
• The global recession is sapping demand for our exports and commodities. The U.S. economy is in a deep downturn comparable to that of the early 1980s. Our housing market is cooling fast in the face of reduced affordability and plunging consumer confidence. We look for a moderate recession in Canada to last through the first half of 2009, sending the unemployment one percentage point higher to above 7 per cent. A gradual, modest recovery is expected in the second half of next year in response to low interest rates and some pick-up in U.S. demand. But this depends critically on an easing in the global credit crisis, which in turn depends on some stabilization of U.S. house prices.
• Canada will benefit from other countries’ fiscal stimulus packages indirectly, via support for our exports and commodities. A probable large fiscal plan in the U.S. early next year will go some ways to supporting a U.S. economic recovery. A large fiscal package from the Canadian government would provide welcome, direct support to the economy. Given the dire economic situation, voters would forgive the government for running a temporary deficit. The government can borrow at historically low interest rates today. A focus on infrastructure projects would preserve some of the jobs that will be lost in coming months, and boost long-term productivity.
• … infrastructure spending is the way to go to support a recovery. Once blue-chip companies see the light at the end of the economic tunnel, they (and other investors) will buy back their undervalued shares.
Mr. Guatieri also went to explain that a Depression is extremely unlikely given the tools available to economists and the social support that were not in use in the 1930s.
So, those who have lived through the recessions of the 1970s and 1980s will recall governments’ efforts to boost infrastructure spending to kickstart ailing economies. Provincial and federal governments will return to this strategy to keep the coming downturn shallow and as short as possible. Both levels of government should strategically exploit low interest rates and go into deficit if necessary.
Contrary to the statements of some ignorant journalists, government deficits are necessary during troubled economic times, are strong stimuli for boosting economies, and should not be shunned. Any government that fails to spend to boost its economy out of a recession is failing to do its job.
At the start of November, Alberta Finance had regiestered $276 billion in major construction projects planned, underway, or recently completed. $11.9 billion worth of projects are in the Athabasca – Grande Prairie region and $5.7 billion worth are in the Camrose – Drumheller region (including Lloydminster).
No information was provided about timing of the projects, and since the report’s release, some petro-chemical companies have announced postponement of large-scale projects, but we know that the Government of Alberta needs to rebuild much infrastructure that the Klein government allowed to decay. So, Alberta is well-placed to endure the coming downturn without as much pain as elsewhere in Canada, or the world.
Sources:
Globe and Mail article: http://www.theglobeandmail.com/servlet/story/RTGAM.20081119.weconomydiscussion1119/BNStory/Business/home
Alberta Finance: http://www.albertacanada.com/documents/SP-EH_monthlyEconomicReview.pdf
To download this article with tables and figures, click here
Link
— Michael Hogan
Strategy for Uncertain Times
To download this artice with tables and figures, click here
To download the compiled tables of economic forecasts, click here
Economic Forecasts
Economists release forecasts to provide some guidance on how things might look over the next period. Like everyone else, they lack a crystal ball so they cannot make predictions with 100% accuracy, so they strive to get into the ballpark. However, when their forecasts and outlooks vary by such a wide degree as they do now, you know there remains a lot of uncertainty in what the future holds.
Fortytwo Consulting has just compiled the latest forecasts and outlooks from Canada’s major banks and found the following:
• Canada’s Real GDP expectations for 2009 range from -0.2% to 2.0% growth
• Unemployment for 2009 is expected to range between 6.7% to 7.0%
• Canada’s CPI in 2009 could fall between 1.0% and 2.4%
• The CAD$ is expected to be worth between USD$0.775 and USD$0.869 in Q1, 2009.
With the exception of the unemployment expectations, the other key indicators are showing a broad range, making the average business owner wonder if they are all looking at the same economy. Alberta’s GDP estimate ranges from a low of 0.3% growth to a high of 3.0% growth in 2009. That’s a big difference.
Averaging all the results to find some kind of middle ground, we came up with this:
• Canada’s Real GDP for 2009 will be around 0.6% growth, while Alberta will average around 1.5% growth
• The nation’s unemployment for 2009 will be around 6.8%, and Alberta will feel just a slight increase to 3.9% unemployment
• Canada’s CPI in 2009 is expected to be about 1.7%; Alberta’s cooling economy will see inflation return to a manageable 2.8%
• The CAD$ will probably be worth around USD$0.821 in Q1, 2009 and about USD$0.847 in Q2, 2009.
Uncertainty
To say there is uncertainty would be an understatement. The TD Bank took the unprecedented step of releasing a base-case forecast and a worst-case forecast. No-one seems to have a handle on whether Canada will drop into a deep recession or avoid one altogether, nor do they seem to know if it will be a prolonged downturn or just a brief blip. 2008 has certainly had its ups and downs but managed to avoid a technical recession. Will that be the situation in 2009?
The problem with uncertainty is how much discomfort it creates for those with the money – the consumers, buyers, investors, lenders, and company managers. Uncertainty means risk, and risk means no-one spends or lends.
So what is the business operator to do when there is so much uncertainty? How should they adjust to these unpredictable times?
‘Do’s and Don’ts’
In the economic downturn following the World Trade Centre attacks of 2001, the Harvard Business Review published a research article by Darrell Rigby entitled ‘Moving Up in a Downturn’. The article described three stages of a downturn:
1. The Gathering Storm
2. The Hurricane Hits
3. Clear Skies on the Horizon
Each stage has its own characteristics, and requires different responses in order to survive and prosper through treacherous economic times.
The Gathering Storm is when business confidence is high, analysts report slowing economic growth, and company divisions start reporting that they might not meet budget. Rigby found that the best way to handle this situation is to prepare for the worst, but focus on what it is your business does best. Running planning sessions to create responses to potential bad-case scenarios can prepare a team to cope with most situations that are likely to arise. Waiting until the storm hits will only result in knee-jerk reactions that are doomed to fail, or worse, cause permanent damage to the company.
When the hurricane hits, Rigby believes it is best to keep an open eye on the good times that are surely on their way. Cost management is an important part of business management, but it must be consistently practised regardless of the state of the economy. Cutting and slashing during a rough period is not necessarily the best answer. Rigby states:
“Consider that voluntary employee turnover averages 15% to 20% per year in the United States, that sales volume was depressed by less than 10% in 85% of all industry downturns from 1977 to 1999, and that the average recession during that period lasted only 11 months… you have to wonder why there is such a scramble to fire – and then rehire and retrain – so many employees.”
And there is little to be gained from pressuring suppliers to reduce their prices because when the good times sweep back in, those same important suppliers will be focusing their loyalties elsewhere, to those clients who stuck by them and helped them through. If there is a pressing need to reduce the costs of inputs, work with your suppliers. Use them as consultants to advise how you might reduce your costs through more streamlined order processing, improved deliveries, or improved product design, for example.
Then, as the clear skies appear on the horizon, start to ramp up in a controlled, managed way. Having avoided mass firings, the company should be well-situated to move towards maximum capacity output without having to pump large amounts of cash into the operation. Your suppliers, customers, and employees will recognise the company for having maintained close relationships and remained loyal (Rigby, 2001).
In short, Rigby’s findings for enduring a downturn were:
• Place a big bet on the core business and spend to gain market share
• Manage costs during good times and bad times
• Maintain a long-term view
• Strive to earn the loyalty of employees, suppliers, and customers
Scenario Analysis
Scenario analysis considers several potential ‘stories’ that might impact the company. It can be tempting to work with a change in one factor at a time, but the reality is that when one changes, many or all will change (Grant, 2008). The factors to consider include:
• The political landscape
• Economic conditions
• Socio-cultural aspects
• Technological changes
• Environmental issues
• Legal concerns
For example, the Government of Alberta’s decision to adjust the royalty program for oilsands miners stemmed from a combination of an overheated economy taking its toll on a burned-out worker population, and growing concern for the (perceived) environmental damage done, which is of itself a socio-cultural factor of the present times. The net flow-on effects will be seen when the new royalty program kicks-in. What have you done to prepare for those effects?
For an Alberta business operator looking forward over the next six months, consider scenarios that include the following aspects:
• Worsening credit conditions – Do you have enough cash to make it through? What kind of order backlog do you have?
• A worsening of the geo-political situation – Recently, there have been odd reports popping up of a future synchronised attack on western nations by Al Qaida. What would this do a fragile global economy? What impact would flow to your company?
• A sudden change in business confidence when the US Presidency changes – Will you be prepared for a sudden upswing?
• If the federal government introduced ‘green’ legislation, what impact would it have on your business? Would it be an opportunity or a detriment for you?
• If you have the resources to improve your production technology or processes, will this gain you extra market share, more clients or profits, effectively fending off a downturn’s impact?
You probably have many others that you can come up that have more specific bearing on your business, but mix them in with some of these suggestion and see what your managers and staff come back with as potential solutions.
Finally
In closing, Fortytwo Consulting suggest keeping Rigby’s key points in mind, and take the time now to develop some scenario analyses with your team. It could help you come out a winner when the dust settles.
References:
Economist.com, T. (2008, November 14). economist.com , p. http://www.economist.com/.
Grant, R. M. (2008). Contemporary Strategy Analysis. Oxford: Blackwell Publishing.
Rigby, D. (2001). Moving Upward in a Downturn. Harvard Business Review , 99 – 105.
Sources of economic forecast data:
RBC Economic Financial Markets Forecasts, November 4, 2008
RBC Economic Forecast Detail, November 4, 2008
RBC Provincial Outlook, October 2008
Bank of Canada Monetary Policy Report, October 23, 2008
BMO Capital Markets Economics Provincial Economic Outlook, November 6, 2008
BMO Capital Markets Economics North American Outlook, November 4, 2008
TD Economics Revised Economic Forecasts, October 31, 2008
TD Economics Provincial Economic Outlook, October 16, 2008
Scotiabank Group Global Economic Research Forecast Update, October 31, 2008
Scotiabank Group Global Economic Research Foreign Exchange Outlook, November, 2008
Scotiabank Group Global Economic Research Provincial Forecast Update, October 31, 2008
CIBC World Markets StrategEcon Economic Update, October 31, 2008
CIBC World Markets StrategEcon Interest & Foreign Exchange Rates, October 31, 2008
© Fortytwo Consulting Ltd.
To download this artice with tables and figures, click here
To download the compiled tables of economic forecasts, click here
Link
— Michael Hogan
Canada’s May 2008 GDP Results
If the Canadian economy isn’t in the toilet, it is certainly looking very wobbly on the seat. May’s GDP result of -0.1% after April’s 0.4% growth means the economy is a little unstable. The fact that most of the economists at the major banks were unable to forecast May’s results indicates that these are still very uncertain times. (StatsCan’s May 2008 report can be found here.)
May’s results threaten to draw down the second quarter’s overall GDP. Should this happen, the Canadian economy will be in a technical recession.
StatsCan’s graph (source link here) below shows the ups and downs of 2008 so far.
Somewhat surprisingly, despite increased oil extraction output, the energy sector slipped 0.9% in May (source link here) due to natural gas inventory adjustments and crude oil “production difficulties”. StatsCan reports that contract drilling was down in May due to unseasonal weather. Nonetheless, oil & gas extraction remains at similar levels to those of 2006.
Manufacturing edged up 0.1% with computer and electronic products making a notable gain. This is worth mentioning because it suggests that Canadian companies are investing in their production capabilities, enabling them to realize cost-savings and increase their profitability.
Oil & Gas and Mining
A StatsCan statement that should arouse interest in Alberta was “Manufacturing of petroleum and coal products increased significantly for a second consecutive month, returning to a more normal level of production, following the completion of maintenance and repairs by some refineries in April.” The oil refineries made hay in May recording one of their best months since mid-2003, and increasing output by 7% over April, 2008.
Natural gas distribution has grown in value by 13% since its low-point of April, 2006. An additional 10% growth will have it back to the heady days of 2002.
Of most interest to Albertans and Saskatchewanians is StatsCan’s statement that “Manufacturing of machinery equipment for mining and oil and gas extraction posted a third consecutive monthly increase.” Three months of accelerating production of extraction equipment can mean just one thing: more drilling, and more mining.
The commodities boom has been making headlines for months now. Even though mining is down 4% compared to May 2007, it has been holding steady since January. And Grande Prairie & Lloydminster have been told to be ready to hit the ground running in September: there’s oil & gas to be found.
On July 25, 2008 in its article Oil patch springs $5-billion gusher, The Globe and Mail reported that ” Record commodity prices have given Canada’s largest oil and gas companies war chests filled with ready cash that’s likely to go toward acquisitions, share buybacks and increased drilling over the rest of 2008.” Just a week earlier, the paper reported on a $610-million oil and gas rights sale in north-eastern BC where large reserves of unconventional shale gas reside. That was the week Royal Dutch Shell spent $5.23-billion buying Duvernay Oil Corp, acquiring its stake in that region’s shale gas.
Alberta & Saskatchewan Business Outlook
With September poised to see increased activity in the oil and gas fields, and the commodity boom unlikely to lose steam any time soon, Alberta & Saskatchewan are looking like the best provinces to be in.
The real estate market is deflated and mortgages are harder to get. The people making money (i.e. those working in the oil & gas and mining, and affiliated sectors) are less likely to be investing in real estate, so will probably turn to home renovations. Kitchens, bathrooms, flooring, and some furniture will become popular purchases.
Eating out will not decline, but it might shift. In other words, expensive steaks three nights a week could evolve into expensive steaks one night a week, and hamburgers the other two nights. People will still go to the movies and buy alcohol. They will still buy chocolate and ice-creams. They will just do it less frequently.
Vacations will be trimmed from flights to Europe to inexpensive all-in packages to Vegas or Mexico. Driving holidays are less likely to cross time zones, and more likely to cross counties.
Business travel has shrunk, and will shrink some more – it’s a good time to own shares in telecoms.
Suggestions for Strategy
Many companies will soon be starting their 2009 business planning. Flexibility will be key for the coming twelve months.
Fortytwo Consulting advises analysing based on best- and worst-case scenarios, then plan for the middle ground. Set your goals and objectives so they are measurable on a monthly basis, providing you with the ability to accelerate or slow your work efforts as necessary. Determine your best indicators and set up a dashboard for monthly monitoring of what the future may bring, allowing for adjustments to your strategy in advance.
Depending on your company’s positioning and generic strategy, you might consider expanding your product offerings to expand your price offerings. Alternatively, now might be a good time to reduce some of the products or services you offer, and pare back to your core products. Many environmental factors will influence which is best for your company.
The best thing you can do is increase your marketing efforts. During periods of uncertainty, fortune favours the brave.
Link
— Michael Hogan