Bank of Canada Summer Business Outlook Survey - Implications for Alberta & Saskatchewan

Published July 7, 2008

The Bank of Canada has released its Summer 2008 Business Outlook Survey summary (you can find the report here) today. Fortytwo Consulting believes the BoC will announce on July 15 that interest rates will increase by 0.25%. Here is why:

1. The Business Outlook Survey indicators “do not suggest widespread weakness across Canadian firms”. In other words, economic growth has slowed, but there is now little risk of a recession.

2. There is a strong belief in the business community that high commodity and energy costs will mean higher costs of production, which will be passed on as higher prices for consumers.

3. The prices of imports, particularly those from China, are increasing, adding to inflationary pressures.

4. There is plenty of liquidity (available cash) in the market and fewer firms are reporting tighter credit conditions.

5. Domestic demand remains healthy and almost half of Canadian businesses (the majority of them being in the western provinces) report pressure on the ability to meet output demands.

These five conditions mean that the BoC can turn its attention to its primary goal of controlling inflation at less than 3%. While recent reports have shown inflation to be below 2%, the concern lies in the business community’s expectation for high inflation later this year and into 2009. Expectations of inflation tend to become self-fulfilling, that is, if businesses expect higher inflation, they will raise prices. These increased prices will continue to flow through the economy and will fuel wage increases, which in turn leads to further price increases.

By increasing interest rates, the BoC will be sending the business community an important message: inflation will not be permitted to get above 3%. This should then short-circuit the self-fulfilling prophecy and ease concerns about snowballing increases in prices.

Absorbing increased costs

Domestic demand is healthy and so is competitiveness. This puts businesses in a tough position. Competitive markets make it more difficult to raise prices, making it difficult to pass along higher costs, effectively putting pressure on business to absorb the increasing production costs. Similarly, employees are less likely to get wage increases, forcing them to become more careful with their expenditures. In other words, everyone is expected to absorb the higher costs.

This shifts the focus to efficiencies and productivity gains. It means businesses will start investing in new equipment (which is happening now) to gain those efficiencies. It also means consumers will be looking to use less fuel and less electricity, cut back on luxuries, and seek lower priced groceries.

Western Canada

The Business Outlook Survey highlights the disparity in regional business-cycles. While Central and Eastern Canada slows, business sentiment in BC, Alberta, and Saskatchewan remains strong. Businesses here expect increasing sales growth over the next 12 months. They report intentions to increase their investment in new equipment and machinery to alleviate production capacity pressures and continuing labour shortage issues.

With commodity-rich western Canada powering along, the Canadian economy will avoid recession and achieve modest economic growth.

Alberta will benefit from the high price of oil and gas with increased exploration and drilling activity. Persistent local labour shortages will mean annual salary and wage increases will again average around 4%, however, immigration from Central and Eastern Canada is likely to increase again especially given the increasing layoffs in the manufacturing sectors there.

Local consumer demand will likely ease due to concerns about the national economy and inflation, and the cooling housing market. Demand for gasoline will decline as witnessed by a reduction in SUV purchases, and will cause consumers to consider carefully their purchases. Summer vacations will likely consist of destinations within a 4- to 8-hour drive. Non-essentials, luxuries, and those purchases that can be delayed, will be put off until 2009.

Suggested courses of action

This wait-and-see attitude will mean many Alberta businesses are likely to find profit-making a little more challenging in the short-term.

Fortytwo Consulting recommends the following actions:

1. Consider expanding your product range and product lines so your customers have a wider choice of pricing options, avoiding the need for discounting.

2. Explore new market segments to increase your opportunities for revenue generation.

3. Become more efficient in energy consumption, and, through new plant and equipment, computers and software, increase productivity.

4. Defend your market share and prevent competition from poaching your customers by:

i. Stepping-up promotional activities, particularly two-for-one deals – more of your product on your customers’ shelves means less opportunity and less need for them to go to the competition;

ii. Increasing your marketing communications with your customer base – remind them of why they like your business, what your competitive advantage is, and the benefits of buying from you;

iii. Enhance your loyalty program – if you don’t have one, now would be a good time to introduce one.

5. Think about taking over any competitors who might be showing signs of struggling. You will automatically gain increased market share and new clients. This might not be an opportunity at the moment, but it might become possible later, so think about it and prepare for it now.

6. Conduct employee satisfaction surveys so you can gauge how they are feeling, what their intentions are for staying with your company, and prepare for succession. It’s expensive to find, hire, and train new staff. It impedes productivity and can result in costly mistakes. Invest in finding out what they expect, what they want, and what they need so you can take the appropriate action to keep them with you.

7. Conduct client surveys to determine how they are feeling and what you can do to ensure they stay with you. They will be looking at your competition, seeking alternatives, and you should be taking the right action to prevent them from doing that.

These are uncertain economic times. While Alberta and Saskatchewan will not be as hard hit as Central and Eastern Canada, there will still be some uncertainty. Having the right information to make the right decisions now will ensure survival and continued success.

— Michael Hogan