Posted: 29 Apr. 2020 5 mins min. read

Surveys provide key insights into Canadian business strains and sentiment, US economy contracts

Key insights into business strains and resilience

The Canadian Survey of Business Conditions (CSBC), a joint effort between Statistics Canada and the Canadian Chamber of Commerce, was released today. The survey is a view into how our businesses are faring during the COVID-19 shutdown. The survey is of 13,000 businesses. It shows the strains that businesses are under.

In term of cash balances, 42 percent of businesses couldn’t operate longer than 60 days without a source of revenue while 51 percent couldn’t operate longer than 90 days without a source of revenue.

81 percent have experienced a medium to high drop in demand for services or products.

In terms of business revenue in Q1 2020 compared to Q1 2019: 11 percent experienced an increase in revenue, 14 percent saw no change in revenue, 18 percent experienced a decrease in revenue of up to 20 percent, 54 percent experienced a decrease in revenue of over 20 percent.

38 percent have reduced staff hours or shifts, while 41 percent have laid off staff.

Select findings exploring the resiliency of Canadian businesses include:

  • 18 percent of businesses have altered methods of production
  • 35 percent of businesses have altered products or services offered
  • 45 percent of businesses are using new methods to interact with customers 
  • 44 percent of businesses are testing working from home
  • 12 percent of businesses are testing e-commerce
  • 11 percent are trying new staff training
  • 62 percent of businesses say they can return to a state of normal operations within one month of social distancing measures being removed

Small business sentiment proves resilient in April

Small and medium-sized enterprises (SMEs) will be one of the hardest hit segments of the Canadian economy during this recession. The lockdown of the economy and the shutdown of non-essential services will be a blow to companies that are modest in scale and have less financial resources than larger businesses to whether the storm. Accordingly, I am always looks for insights on what is happening to SMEs. The Canadian Federation of Independent Businesses (CFIB) is a great source of information.

Today, the CFIB released their Business Barometer—an index that tracks Canadian business sentiment—and there was a glimmer of positive news. The index rose 9 points to a reading of 46.4 in April. However, the level is still close to where it was during the 2008-09 recession. Keep in mind that the Great Lockdown of 2020 is going to be worse than the Great Recession of 2008-09, so sentiment is a bit better than I would have expected.

Ontario and Saskatchewan had the best sentiment, although both were weak. Quebec, Newfoundland & Labrador, and New Brunswick were the most pessimistic. It was a bit surprising that Alberta was not more negative—it was dour but not as bad as the previously mentioned provinces.

SMEs were most negative in the natural resources, finance and insurance, arts and recreation, and agriculture sectors. But, the reading across sectors were consistent with recession, but with one exception—health and education services that I suspect this reflects acute demand for health related products and services as the country battles COVID-19.

US economy enters recession in the first quarter

US real GDP declined by 4.8 percent annualized during the first quarter of 2020, more than the 4 percent that financial markets were expecting. The decline marks the steepest drop in activity since the depths of the Great Recession, when the economy contracted by 8.8 percent. As a comparison, the Canadian economy is estimated to have declined by about 10 percent in the first quarter—double the US figure—largely due to an earlier implementation of containment measures as well as preexisting vulnerabilities such as rail blockades and teacher strikes.

The US contraction was entirely due to a collapse in personal expenditures. Consumption fell 7.6 percent. Spending on durables (products with long shelf lives like cars for example) fell 16.1 percent, as motor vehicle sales tanked by 35.9 percent. Spending on services, typically stable, slumped by 10.2 percent as transportation, recreation, and hospitality spending all retrenched by nearly one-third. In contrast, spending on nondurable goods (products with shorter lifecycles) increased by 6.9 percent, with grocery spending up 25 percent as people stocked up on essentials.

Nonresidential investment fell 8.6 percent during the quarter. Spending on intellectual property (0.4 percent), which includes software and R&D, was the only category to hold-up, while both equipment declined by 15.3 percent and structures declined by 9.7 percent, spending fell on COVID-related shutdowns and sharp declines in oil and gas rigs.

Exports fell 8.7 percent, primarily due to services exports, as inbound tourism activity came to a virtual standstill in March. Imports declined 15.3 percent, with both goods and services imports down sharply as restrictions on travel and trade began to be enforced.

Business inventory investment was down $16.3B, its first decline in seven quarters, shaving 0.5 points from topline growth.

The only categories to register growth were residential investment and government. Housing investment increased by 21 percent on a transitory surge in housing starts at the end of 2019. Government spending ticked up 0.7 percent with strong gains in federal nondefense spending and investment at the state and local level. Remember that this is before the US stimulus measures that will impact in the second quarter.

Given the economic lockdown and global downturn, the US economy is expected to contract by more than 30 percent annualized in the second quarter. So, we are comfortable with saying that the US is in deep recession that is worse than the one in 2008/09.

The Federal Reserve completed its two-day meeting, leaving the federal funds rate target at the effective lower bound range of 0 to 0.25 percent. The Fed expects to maintain the target in this range until the Committee is confident that the US economy has “weathered recent events” and is on a path towards “maximum employment and price stability." The Fed altered its risk assessment of the ongoing pandemic noting that, in addition to the near-term risks to the economy, it poses “considerable downside risk to the economic outlook over the medium term.” This is relevant for the Canadian economy due to our close trading ties and deep integration into North American supply chains.

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A regularly updated snapshot by Deloitte Economics that provides commentary from Chief Economist, Craig Alexander on the latest developments shaping Canadian and international economies including, economic growth, business investment, trade, and market activity. Deloitte analysis gives you the knowledge to tackle the most challenging business issues of today.

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