BUSINESS

With Election Looming, Canadian Business Mood Turns Downright Foul

10/15/2015 02:54 EDT | Updated 10/15/2015 04:59 EDT
CP

Whoever wins Canada’s election on Monday will find themselves facing a business environment that’s gloomier than any seen since the Great Recession.

The latest Canada Business Monitor, which surveys professional accountants, found pessimism among businesses climbed sharply in the third quarter of this year.

Fully 40 per cent of respondents were negative about economic prospects, up from 20 per cent in the previous quarter. Only 17 per cent were optimistic about Canada’s economic prospects over the next 12 months. That’s the most pessimistic result since 2009, when Canada was in the midst of a sharp recession caused by the financial crisis in the U.S.

Low business confidence can have a meaningful effect on the economy. Business investment and hiring usually suffers when decision-makers are worried about the future.

Small businesses are also feeling the fear. The CFIB’s business barometer for the third quarter, released last month, also showed the lowest level of confidence among small businesses since the financial crisis.

“It appears that firms do not expect their business performance to improve significantly, or at all, despite calls for a rebound in real GDP growth over the remainder of the year,” TD Bank analyst Diarra Sourang wrote.

The most common reason given for the pessimism is the collapse in oil prices that began in the second half of last year.

“What a difference a year makes,” said Kevin Dancey, CEO of Chartered Professional Accountants of Canada (CPA Canada), which commissions the quarterly Business Monitor.

“So far this year, pessimism levels have been higher than usual. However, more recently, there have been mixed indicators about where the Canadian economy is heading, including signals of growth, so it will be interesting to see what the next quarterly results reveal.”

Analysts estimate that Canada emerged from recession in the third quarter, with the economy getting a much-needed boost from exports helped by a lower loonie. But Canadian businesses may have been spooked by global market turmoil this summer, particularly the stock market crash in China.

And while many analysts estimate Canada’s economy grew more than expected in the third quarter, an increasingly gloomy outlook for energy prices means longer-term forecasts for Canada are looking worse. The International Energy Agency said this week the global oversupply of oil will continue through next year, making a rebound in oil prices unlikely.

The IMF downgraded its forecast for Canada earlier this month, largely due to a collapse in energy-sector investment. It now says Canada’s economy will grow just 1 per cent this year, down from an earlier estimate of 1.5 per cent. The Bank of Canada, too, is now forecasting growth of just 1 per cent for 2015.

But the Conservative government’s latest budget, on which it based its forecasts of budget surpluses going forward, assumed economic growth this year of 1.9 per cent — nearly twice what economists now expect. If the new forecasts prove to be right, government revenues could easily fall short of the levels forecast in the last budget.

Regardless of the budget balance, Canada’s next government looks set for a financial struggle. Between the poor long-term outlook for energy prices and the recessionary mood among businesses, a return to trend growth looks increasingly out of reach, and the political headache of a poor economy now seems almost certain.

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