I have spoken to the leaders of two large Canadian companies recently. One heads a Montreal-based designer and seller of shoes with stores all over the world. The other runs an Alberta trucking company that employs thousands people hauling bulk goods around Canada and the United States.
Guess which one was feeling better about life?
“Business for us is good,” said David Bensadoun, chief executive of closely held Aldo Group Inc., who this month announced a partnership with Lasalle College in Montreal that will allow the school to offer a specialization in shoe design. “It seems like (store) traffic is stabilizing,” he said.
Things are less good at Okotoks, Alta.-based Mullen Group Ltd., which oversees some 30 businesses devoted to trucking, logistics, and oilfield services. “Some are doing well, and some are doing bad, but it’s a net zero-sum game,” Murray Mullen, the chairman and chief executive, said in his Calgary office on April 11. “In our trucking business, I have 31 companies in our group. I don’t have one company growing internally today. Something’s wrong. The economy has stagnated.”
Canada is two economies and next week the Bank of Canada has to decide which one of them is dominant.
Governor Stephen Poloz and his deputies on the Governing Council this week began deliberating over their next policy decision, scheduled for April 24.
They will leave the benchmark interest rate unchanged at 1.75 per cent, that is certain. Less clear is whether the path they set out at the beginning of the year remains the right one. Back then, interest rates were firmly on hold, but there was a hint that borrowing costs could resume moving higher later this year. The most recent indicators suggest that is unlikely now. The end-of-2018 slump that forced the central bank to the sidelines just isn’t improving.
“We’re getting more concerned about an external slowdown,” Poloz told a small group of reporters on April 13 as the Spring Meetings of the International Monetary Fund wound down in Washington.
The comment reflected the subdued tone of the meetings, where officials attempted to square buoyant equity markets with evidence that the global economy has lost momentum. Whereas a year ago most of the world’s major economies were growing, some 70 per cent are now experiencing a slowdown, as the trade wars curb global commerce and chill business investment.
“We contend that we are at a delicate moment,” said Christine Lagarde, the IMF’s managing director. Her advice to policy makers was to “do no harm,” and to “do the right thing.” In other words, err on the side of growth and put an end to the tit-for-tat application of punitive tariffs.
There’s new evidence that trade policy is weighing on Canadian business confidence. The BoC’s latest quarterly Business Outlook Survey, one of Poloz’s favourite indicators, is notably downbeat. Expectations for sales over the next 12 months are positive, but “have softened,” according to the survey, which was conducted in February and March and published on April 15. The number of businesses that said they were struggling to keep up with demand “has declined to a low level,” and the survey’s overall indicator of sentiment decreased from a “strongly positive level” in the winter to “slightly negative” heading into the spring.
“We see a soft (Business Outlook Survey) indicator causing the BoC to move to a purely neutral bias at next week’s rate meeting,” Mark Chandler, head of Canadian rates strategy at RBC Dominion Securities Inc., advised his clients in an email on April 15.
The survey listed weaker real-estate markets, trade policy (including Canada’s retaliation against U.S. tariffs on exports of steel and aluminum), and the ongoing struggles in the oil patch as the main factors behind the moodier sentiment. In the winter, about half of respondents expected “strong” U.S growth over the next 12 months. That figure now is 17 per cent, with some 70 per cent calling for “slow growth” in Canada’s dominant trading partner. Very few predict a recession, however.
The report “could have been better, but it could have been worse,” wrote Toronto-Dominion Bank economists Brian DePratto and Ksenia Bushmeneva.
Some companies are pushing through the headwinds better than others. The BoC survey noted specifically that companies in Quebec continued to report “solid” sales prospects. Bensadoun said he had taken advantage of Canada’s new trade agreement with the European Union to double imports from Europe, and that he would avoid the tangle between the U.S. and China by sourcing Asian production from Vietnam.
Investment intentions outside the Prairies “remain healthy,” the BoC survey said.
But the Prairies are an important part of the economy, and until those provinces shake off the effects of weaker energy prices, the central bank will have a reason to leave interest rates low.
After oil collapsed in 2014 and 2015, the BoC predicted that it would take three to five years for the shock to wear off. But according to anecdotal evidence, the drag from weaker crude prices continues. Mullen reduced his exposure to oil, but he can’t do anything about weaker economic growth. His strategy involves acquisitions that will allow Mullen to become more efficient, but he concedes that each time he buys a company, people will lose their jobs.
“What I’ve observed is that companies are finding many ordinary, and many more exotic ways, to reduce their costs,” Poloz said in Washington. “They are adjusting to a lower-prices world, but from what I’m hearing, that isn’t done.”