The blessings of inexpensive oil
Outside of the energy space, firms are benefiting from lower fuel costs, a weaker loonie and U.S. demand
Canadian small businesses have a lot to be jittery about just a month into the new year. A slowing Canadian economy, collapsing oil prices and weak global demand have all conspired to dent the confidence and outlook for Canada’s small businesses.
The latest Business Barometer survey from the Canadian Federation of Independent Business showed that businesses in only three provinces registered improvements in confidence in January.
“Only 55% of owners are planning to make any capital expenditures in the next 12 months — a post-recession low,” the CFIB notes in its report.
The current economic climate, however, is masking a number of success stories. Many companies outside the energy space are actually benefiting from a “perfect storm” of business friendly shifts in the market — lower fuel prices, a weaker Canadian currency and burgeoning demand from U.S. consumers.
“Business is currently very good for us,” said John Marsh, president of Elecompack Systems, a medical office supplies company based in Mississauga, Ont., that sells products in Canada and the United States. “A lower loonie and good demand in the U.S. mean we’re sitting in a favourable position,” he said.
There are many reasons for Canadian businesses to be uncertain. The collapse in oil prices has forced policy-makers in Canada to act; the Bank of Canada last month announced it was making a surprise cut to its benchmark interest rate to offer what it called “insurance” against the oil price shock.
Finance Minister Joe Oliver was also forced to delay the federal budget recently, saying in a speech that the government needed extra time to factor in low oil prices.
The uncertainty around oil prices has led many economists to downgrade their outlooks for the Canadian economy. Bank of America Merrill Lynch cut its 2015 growth forecast to 2.1% recently, compared with its earlier call of 2.4%. Its economists said they now expect many businesses in Canada to continue to rein in capital spending as economic uncertainty takes its toll.
A lack of capital spending is likely to irk the Bank of Canada, which has stressed the need for Canadian businesses to start spending — given that much of Corporate Canada is sitting on a record pile of cash reserves. Governor Stephen Poloz has noted that the Canadian economy can no longer rely on highly indebted consumers and governments to expand gross domestic product.
But economists say the collapse in oil prices, which has seen the value of a barrel of crude pull back more than 50% since last summer, has all but erased hopes that many businesses, especially in the hard-hit energy sector, will increase spending this year. Most publicly traded oil and gas companies have already announced huge spending cuts.
CFIB’s most recent Business Barometer shows that small-business confidence in oil-producing provinces is taking the biggest hit, and will likely continue to suffer as oil prices hover near six-year lows. But outside of the energy space, the picture is a bit brighter.
Dan Kelly, CFIB’s chief executive, said it may take a few months for companies benefiting from lower oil prices to register increases in confidence.
“The fall-off in confidence from lower oil prices showed up right away, that scared everyone,” he said. “But we have to wait for the bills to come in, the sales to come in, to see how lower fuel costs benefit many businesses, those that ship their products, those that provide transportation. Because this helps them.”
Businesses outside of energy are also benefiting from a lower Canadian dollar, which is actively helping exporters ship more goods. The loonie fell below US80¢ last week and economists say it will likely continue to drop this year because of slowing growth.
For many retailers, especially in Canadian border towns, the lower dollar has another benefit, Mr. Kelly said. “We heard from many of our businesses on the border that losing sales to U.S. retailers was a large challenge,” he said. “That’s subsided in the past year and now we are also hearing about more tourists coming to Canada.”
Elecompack’s Mr. Marsh said because his company does business in both Canada and the U.S., his exports and sales have benefited from the dip in the loonie and the resurgent U.S. economy. “It helps us and we expect that it will continue to help us if it stays at this level,” he said.
Mr. Kelly said he expects a dichotomy in confidence to continue between resource provinces and the rest of Canada as oil prices stay low.
His prediction is for a mixed year in capital spending, as some companies ramp up operations to benefit from cheaper fuel costs and a weaker loonie, while others cut spending or delay purchases, especially those that import machinery and equipment from outside Canada.
“The oil price situation is not necessarily pure doom and gloom as some make it out to be,” he said.
“Really, I expect it to be a bit of a mixed year.”