News Article

Economic News: Outlook brighter

Posted: April 11, 2012

The latest economic numbers are displaying a spring-like optimism. Businesses surveyed for the Bank of Canada's Business Outlook Survey  are clearly positive about the next 12 months, March employment figures have far outdistanced expectations and corporate Canada is "fit as a fiddle,î as CIBC's March 27 Economic Insights reports.

And that is good news for an economy that has been struggling with household debt and government cost-cutting. "Even with public-sector retrenchment underway, and indications that consumers may not have the same appetite to spend as earlier in the recovery,î write CIBC economists Benjamin Tal, Andrew Grantham and Avery Shenfeld in A Corporate Health Check: Fit as a Fiddle, "corporate Canada could be positioned to pick up the mantle and drive economic growth in the years ahead.î

The only persistent risk to global growth is escalating oil prices. Writes Shenfeld: "Crude's fate is tied up in the tricky geopolitical dance taking place between Iran and the West, and given the lack of transparency in Iranian politics, a more disruptive misstep is a risk.î

But even then, there is cause for subdued optimism. "As a net exporter of oil, and a more significant consumer of renewable energy, Canada is much better positioned than the U.S., Europe or Japan to weather such a storm,î he adds. "A given oil price jump results in a 50% greater hit to growth in the U.S. than in Canada.î

Certainly businesses are optimistic about the year ahead. According to the Spring Business Outlook Survey, sales grew over the past 12 months and are expected to grow at an even faster rate over the next 12, based on order books and new contracts. That spills over into increased investment in machinery and equipment and rising employment. "Most firms expecting to expand their workforces cited the need to support current or expected sales growth,î reports the Survey.

Statistics Canada's release of March employment numbers was another harbinger of an economic spring. It wasn't just that the 82,000-increase followed four months of little change and knocked the unemployment rate down 0.2 percentage points to 7.2%; it was more the composition of the jobs that created the excitement.

"The underlying details of the employment report were extremely positive,î writes TD Bank economist Sonya Gulati in a report, "with gains being broad-based across sectors and industries. The majority of the gains were in full-time positions (more than 70,000), and part-time job creation was a more modest 12,400. Private sector job creation led the way with 42,600 net new positions, the public sector came next with 20,900 and last but not least, the self-employed sector created 18,800 net new jobs.î

Dawn Desjardins, assistant chief economist at Royal Bank of Canada, reviews the past 12 months and notes a healthy trend: full-time employment was up 181,300 with part-time employment up a smaller 15,900. As well, average hourly wages for permanent workers were up 2.5% in March compared to a year earlier.

Adds Gulati: "With private sector employment creation starting to put together a string of healthy positive numbers, we see that the economic growth baton is, indeed, being shifted from the public sector to the private sector.î

Certainly, Canadian businesses have never been in a better position, according to CIBC's composite indicator of corporate strength. Based on nine indicators ó debt-to-equity ratio, cash-to-credit ratio, profit margin, return on equity, return on capital, export diversification by commodities and by countries, business bankruptcy rate and business confidence ó the composite is signaling robust growth:

ï Debt-to-equity ratios are below long-term averages and have risen only slightly from 2007 lows.

ï Cash as a proportion of corporate credit is at an all-time high of almost 60% (vs. 20% in the 1990s), providing "a considerable cushion.î

ï Profit margins ó despite a backward slide during the recession ó are again "within shouting distanceî of their 2008 peak.

ï Return on equity took a hit during the recession but has quickly bounced back. That rebound, reports CIBC, has been held back somewhat by two of Canada's strongest-growing sectors ó oil & gas extraction and construction. The accommodation & food sector, on the other hand, posted a return on equity three times its historic average.

ï Business confidence finished 2011 slightly above long-term averages, despite global volatility.

ï The bankruptcy rate is at its lowest in at least 30 years at only three per 1000. The long-run average is closer to 10.

ï On the diversification front, exports to developing countries are increasing after a long history of focusing on the U.S. But diversification by commodity is not as impressive, although Canada is not as heavily reliant on oil as it once was.