Businesses are being squeezed on both sides of the profit equation. Higher wages and higher energy prices are pushing up costs. Weak demand, competition, and the dollar are limiting profitable growth.

Atlantic Canada’s corporate leaders are bullish about their ability to overcome increasing competitive pressures. In the 2008 TOP 101 survey, companies reported that higher energy and transportation costs, the higher Canadian dollar, and weakening demand are all hurting their businesses more than in 2006. But 90% of respondents to this year’s TOP 101 survey expect to grow their global revenues over the next 12 months, and 82% anticipate an increase in profits. Both these numbers are similar to the 2007 survey, but up noticeably from 2006. Worldwide revenues of this year’s TOP 101 firms exceed $38 billion.

Higher energy prices remain the biggest challenge facing the largest businesses headquartered in the Atlantic provinces. About 43% indicated that higher energy costs are currently having a large or very large negative impact on their business, up from 30% in 2006. Global energy prices, particularly oil, have increased substantially since 2002, as developing nations boosted aggregate demand while new supplies failed to keep pace with declining output from mature fields. Manufacturing firms are hurting the most. About 68% of manufacturers in this year’s TOP 101 survey stated that high energy prices are having a large or very large negative impact on their operations.

Energy prices continued to soar over the first half of 2008, with oil prices reaching a record $145 (U.S.) per barrel in early July. Measured in Canadian dollars, oil prices were 60% higher in the second quarter of 2008 than in the second quarter of 2006. Natural gas prices increased by a similar amount over this period, while coal prices more than doubled. These price hikes for fossil fuels are feeding through into higher electricity prices. Nova Scotia Power has requested a 10% to 12% price increase for commercial users, and a 12% to 17% increase in industrial prices effective January of 2009.

Rising energy prices are also feeding through into higher transportation costs. The cost of diesel in Saint John, N.B., has increased more than 28% from the second quarter of 2006 to the second quarter of 2008. Higher gasoline and diesel prices and fuel surcharges for air travel are having a widespread impact on commerce and travel. About 28% of TOP 101 firms in the 2008 survey said that transportation costs were having a large or very large negative impact, almost double the number in the 2006 survey. Not surprisingly, it is the trucking and transportation industry that is screaming the loudest, with two out of every three transportation companies in the TOP 101 survey reporting large or very large impacts from higher fuel costs. By contrast, only 9% of other service-producing firms reported such large negative effects.

High prices for energy and other commodities have boosted the Canadian dollar. After breaching $1.09 (U.S.) in November of 2007, the Canadian dollar averaged $0.98 (U.S.) in the second quarter of 2008, up 10% from the second quarter of 2006. The high Canadian dollar continues to create pressures, particularly for exporters. In this year’s TOP 101 survey, about 63% of exporters, including both manufacturers and service exporters, said the high dollar is having a large or very large negative impact on their business.

The number of TOP 101 firms citing stagnant or declining demand as a constraint has increased noticeably since 2006. About 17% of firms cited this as a large or very large factor in 2008, compared with only 6% two years ago. The stumbling U.S. economy and weakening global prospects are less of a concern than conditions in Atlantic Canada. Retailers are the most worried, with 28% citing weak demand as a large or very large factor. High energy and transportation prices are likely a key contributing factor. Higher gasoline prices will dampen auto sales, particularly for larger, less fuel-efficient vehicles, while the increased cost of gasoline and home heating will limit consumer spending on other items.

Government regulations, a lack of skilled workers, and competition from low-cost producers all remain key concerns for Atlantic businesses. About one-quarter of TOP 101 executives report that each of these factors is having a large or very large negative impact on their business. Both Nova Scotia and Newfoundland and Labrador have ongoing red tape and paperwork-reduction initiatives, but there has been little interest among the region’s provincial governments in bolder initiatives to reduce regional barriers, such as the Trade, Investment and Mobility Agreement between  British Columbia and Alberta.  

Atlantic businesses are being squeezed on both sides of the profit equation. Higher wages to attract and retain staff and higher energy prices are pushing up their costs. Weak demand, increased competition, and the higher dollar are limiting the ability to grow revenues and increase prices. While hardly any TOP 101 corporate leaders are predicting reductions in employment, some job cuts and intensified measures to trim costs and improve productivity are likely, as these firms battle through a challenging environment in the months ahead.