The global recession and credit crisis that began a year ago has forced companies to cut back in order to survive, and governments have stepped in with fiscal stimulus. As the region looks to the recovery, an innovative and expanding private sector will be the key to sustained growth and prosperity

I am constantly amazed at how bullish our corporate leaders remain. Perhaps it’s because their job is to be the motivators and drivers of their organizations. Perhaps it’s because I’m an economist, trained in the (inappropriately labelled) “dismal science” to take a cold hard look at both benefits and costs, both the policies that promote economic welfare and the risks of regulatory or market failure. But the optimism of the region’s top CEOs in the face of tough economic challenges has continually surprised me as I have analysed the results of the TOP 101 survey over the past several years.

At first glance, this year’s TOP 101 survey is no different. A majority of TOP 101 firms expect revenues and profits to grow. Even in full-time employment, 41% expect an increase this year while only 10% expect to reduce the number of full-time employees. Yet look a little more carefully, as economists are trained to do, and the impact of the global recession is clearly evident.

Indeed, this year’s results show the weakest levels of business confidence in Atlantic Canada in at least seven years. One quarter of the TOP 101 firms expect revenues to decline this year, six times more than in last year’s survey. Only 54% expect their global revenues to increase over the next year, a considerable drop from the 81% to 91% in the previous five TOP 101 surveys.

Sales slip

Not surprisingly, declining or weak sales has been the biggest challenge facing TOP 101 companies in this recession, cited by 41% of TOP 101 firms. This is already showing up in financial statements, with almost one in five TOP 101 companies reporting lower annual revenues for their most recent year-end compared with the previous fiscal year. Car dealerships are particularly feeling the pinch.

Atlantic Canada has been spared the worst impact of the recession, as indicated by smaller than national declines in revenues from non-energy merchandise exports and retail sales.  Only 9% of TOP 101 firms indicate that their Atlantic sales have fallen by 10% or more, but 32% of TOP 101 companies report a drop of 10% or more in their U.S. and other international markets.

Credit challenges

The global credit crisis has also had an impact in the Atlantic region, causing a number of investment projects to be cancelled or delayed, and creating a headache for firms trying to refinance debt. About 24% of TOP 101 companies report that access to credit is their biggest challenge currently. Half of these firms noted that credit difficulties facing their customers or clients is the real problem, leading to fewer car sales or design projects for engineering firms, for example.

Not all companies have been affected by the credit crisis. Just over half of TOP 101 firms report that their overall access to credit is about the same. But hardly any firms report that credit is easier, despite the drop in short-term interest rates. The nature of financing requirements also plays a role. While only 28% of TOP 101 companies report that working capital is harder to obtain, 44% of TOP 101 firms report it is much harder to finance new projects and expansions.

Cut fast, sell hard

How are firms responding to the economic crisis? With one in five TOP 101 firms citing profitability as their biggest challenge, it is no surprise that TOP 101 firms are responding by cutting costs and finding ways to improve efficiency and boost productivity. Over half of the TOP 101 firms said they are cutting costs in their operations. Capital spending is taking a bigger hit than payrolls, with a number of firms anxious to retain key employees for when the economy recovers.

Many TOP 101 firms are concerned about maintaining their existing client base, while others are looking to take advantage of weakness among competitors to increase their market share. Despite the need to curtail costs, TOP 101 firms are increasing their sales effort in both existing markets and potential new ones. 

Recovery in sight

The recovery seems to be increasingly in sight, with a number of key economic indicators for Atlantic Canada bottoming out in late spring and early summer. There have also been some positive signs in the U.S., including in the housing market. Aggregate economic output (real GDP) is expected to begin growing again in Canada before the end of 2009, and possibly before the end of September. Of course it will take time to return to pre-recession levels of output and employment.

The TOP 101 companies, based on their responses at the time of the survey (early May to mid-June), are a little more pessimistic about the timing of the recovery. The majority of TOP 101 respondents do not expect to see a turnaround in demand for their products and services until 2010.

Indeed, 31% of TOP 101 firms do not expect a recovery in their U.S. and other international markets until after July 2010. Only 18% of TOP 101 respondents expect the recovery in their Atlantic markets to take that long. These responses reflect the more severe downturn experienced in U.S. and international markets. 

Dissecting the recovery

Yet the economic recovery will remain fragile for some time, with a number of risks for both the global economy and the Atlantic region—there’s that cautious economist streak in me shining through again! Indeed, the drivers of and risks associated with the recovery, and the long-term impacts of the recession on Atlantic Canada, will be the focus of APEC’s business Outlook conference this year (see www.outlookconference.ca for details).

One of the key challenges during the recovery will be managing the transition from monetary and fiscal stimulus to private sector-led growth. The Bank of Canada will be looking to carefully return interest rates to more normal levels without thwarting renewed private sector borrowing and spending. The Federal Reserve and other central banks will have to undo their quantitative easing to avoid unleashing inflationary pressures, while being watchful not to trigger another financial crisis.

As growth resumes, governments will become increasingly cautious about providing further stimulus through infrastructure spending and will evaluate how quickly they can eliminate their own fiscal deficits, in the face of rising debt service costs and looming demographic pressures.

The private sector remains the key to Atlantic Canada’s long-term prosperity. Car dealerships and restaurants need to experience employment and income growth if sales are to expand. Construction companies need to see population growth and business expansion if they are going to increase the size and scope of their own firms. And financial and business services companies need a thriving and expanding economy if profits and payrolls are to flourish.

Where will this growth in the Atlantic provinces come from? The global recession and credit crisis have led to the cancellation of a number of major investment projects in the region including a second refinery in both New Brunswick and Newfoundland and Labrador. Other projects have been postponed, possibly indefinitely, including an iron ore expansion in Labrador and a refinery expansion in Newfoundland. Several existing business ventures have shut down and are unlikely to reopen, including mines in both New Brunswick and Nova Scotia, auto-parts suppliers in Cape Breton, a newsprint mill in Newfoundland, and call centres across the region. These projects and companies will not be contributing to the recovery.

If Irving Oil is not going to build a new refinery, how will Saint John create an additional 1,000 high-paying jobs? If growth is not going to come from a small number of megaprojects—although there are still a number with reasonable prospects, such as the Hebron oil project off Newfoundland and Labrador—then it will have to come from expansion of Atlantic Canada’s existing exporters and innovators and from the creation of new companies that can exploit emerging growth opportunities.

Members of the business community have made it clear what they think governments need to do to create a competitive and healthy business and investment climate in the region. Their priorities have been profiled in the results of previous TOP 101 surveys and include cutting corporate taxes, reducing the regulatory burden and investing in strategic transportation infrastructure—priorities that will be harder to implement in today’s fiscal environment.

While respondents to this year’s TOP 101 survey are generally supportive of government steps to stimulate the economy in the short term, many also caution about the need for prudence and to focus on long-term competitiveness. 

Ultimately, the business community creates the wealth that we all depend upon—economists included. This region has many successful and leading innovative and entrepreneurial companies, including those in the TOP 101 list. Whether resource companies, manufacturers, or service providers, we need more of these exporters and we need to see them grow.

So the economist’s analysis of the recovery is complete; now it’s up to the corporate leaders and their employees to make it happen. I’m hoping their enthusiasm and optimism will prove to be well founded—our incomes, both now and in retirement, depend upon it.

David Chaundy is the senior economist with the Atlantic Provinces Economic Council (APEC).