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One in 4 Alberta CEOs say they don’t know if their business can survive this crisis


CALGARY — One in four chief executives in Alberta are concerned their businesses might not survive the economic collapse triggered by COVID-19, according to a new survey.

Alberta is the country’s largest oil and gas producing province and is widely expected to record the sharpest economic contraction and drop in employment this year, following the dual-threat of the coronavirus pandemic-induced business closures and the concurrent collapse in oil prices.

The Business Council of Alberta published a survey of its members Monday that showed 26 per cent of respondents didn’t know if their “organization will survive this crisis until a vaccine is widely available or we otherwise reach herd immunity.”

“It’s a lot and it’s surprising,” said Mike Holden, the Business Council’s chief economist, noting that survey doesn’t mean those companies will file for bankruptcy — just that they consider it to be a real risk. “This is businesses who think there is some risk.”

He noted that 64 per cent of respondents had delayed spending, 61 per cent had laid off employees and 54 per cent had implemented pay cuts to survive the crisis.

So far, only a handful of companies have announced widespread layoffs during the current recession, but Holden said there might be more announcements if temporary layoffs become permanent.

It’s a lot and it’s surprising

Mike Holden

The survey of leaders at 61 companies conducted by Viewpoint Research between May 13 to May 30 also showed that 61 per cent of businesses expect a slow economic recovery.

“Generally speaking, they’re not expecting it to be quick,” Holden said, adding the uncertainty about the depth and duration of the recession has led to a drop in business confidence.

If Business Council of Alberta’s fears are realized and a quarter of businesses don’t survive the current pandemic, it would mark a dramatic uptick in insolvencies and the business exit rate, which is tracked by the federal government.

In 2017, the last year for which data is available, roughly 15 per cent of Alberta businesses exited the private sector, said Charles St-Arnaud, chief economist with Alberta Central, which provides banking services to credit unions in the province.

Signs outside a business in Calgary, on April 30, 2020.

Signs outside a business in Calgary, on April 30, 2020.

Brendan Miller/Postmedia files

By comparison, the data shows the rate of business exits across Canada is about 11 per cent.

“Alberta has kind of a higher entrance and exit rate than other provinces. There is more business creation than average and also more business failures,” St-Arnaud said.

Still, St-Arnaud said he’s expecting to see an increase in insolvencies and business failures as a result of the COVID-19-induced recession. The business closures and insolvencies will likely accelerate in September or October, once federal support programs wrap up, he said.

“The insolvency data for October will have a better look at how bad it gets,” St-Arnaud said.

Large and small companies in the province are struggling to stay afloat. Even as businesses re-open, Alberta’s largest industry is struggling with the dramatic collapse in oil prices and the resultant fall in oilfield activity.

Calfrac Well Services Ltd., one of the largest fracking companies in the Canadian oilpatch, announced Monday that it would defer payment and make use of a 30-day grace period to make an interest payment that was due June 15.

Shares in the Calgary-based company fell close to 9 per cent to 26 cents per share following the news, which warned that a failure to make the interest payment would trigger a default in Calfrac’s credit facilities. The company has drawn $170 million against a $375-million line of credit.

If the company does default, Calfrac would become the first large energy services firm to become insolvent in the current crisis.

The Business Council’s survey noted that the three largest barriers to an economic recovery in the province were low oil prices, a lack of consumer confidence and the global economic downturn causing a lack of demand for exports.

Financial Post

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Big banks able to weather Bank of Canada’s worst-case scenario, but risks higher for households and businesses


Canada’s six biggest banks survived a severe stress test by the Bank of Canada, which is a relief since they might be the only thing standing between a relatively short recession and something much worse.

The analysis was part of the central bank’s latest Financial System Review (FSR), which is devoted to the COVID-19 crisis.

Generally speaking, the central bank appears confident that its historic response to the shutdown of vast swaths of the global economy has averted disaster. Governor Stephen Poloz stuck to his contention that the recession will be brutal, but probably relatively short, in part because there appears to be little reason to worry about a financial meltdown.

The pandemic remains a massive economic and financial challenge, possibly the largest of our lifetimes, and it will leave higher levels of debt in its wake

Bank of Canada Governor Stephen Poloz

“The country’s banking system and financial market infrastructures are strong enough to deal with the situation,” Poloz said before taking questions on a conference call with reporters. “To be clear, the pandemic remains a massive economic and financial challenge, possibly the largest of our lifetimes, and it will leave higher levels of debt in its wake.”

Still, thanks to decent economic growth during the past few years and the hundreds of billions of dollars in emergency funds that Ottawa is pushing into the economy, the governor said he was “confident that a strong financial system will help Canada emerge from this episode in relatively good shape.”

Unlike many of its peers, Canada’s central bank doesn’t have any regulatory authority over financial institutions. But it does have moral authority, and it wields the country’s most impressive array of economic researchers. Thus, the FSR is an important instrument of policy, since central bankers use it to try to guide behaviour, just as they attempt to steer spending habits by raising and lowering interest rates.

Normally, the annual FSR is a warning mechanism. The Bank of Canada flags vulnerabilities it thinks could lead to pain in the event of a shock. Since we’re currently living through such a shock, this year’s review was more of a “state of play,” as Toronto-Dominion Bank economist Brian DePratto observed. “Vulnerabilities abound, but on balance the bank appears to be cautiously optimistic that the system can handle the current and emerging stresses,” he said in a note to his clients.

The Big Six and the hefty cash reserves they must maintain to satisfy federal regulations are a firebreak in this crisis

Policy-makers are confident that they have avoided a credit crunch, albeit only because they took the unprecedented step of creating tens of billions of dollars to buy government bonds and company debt. The policy seems to be working, since interest rates, which spiked in March as investors retreated when the coronavirus spread through Europe and North America, have returned to pre-crisis levels.

Poloz and the central bank’s other leaders are probably less sure about how many companies and households will survive the recession without declaring bankruptcy.

The central bank reckons about twenty per cent of mortgage borrowers entered the downturn with only enough cash and other liquid assets to cover two months (or less) of loan payments. Many companies are equally fragile, as some of the industries hardest hit by the crisis are also the ones in which companies were already operating with relatively little money in the bank.

“COVID‑19 has hit many households and businesses hard, especially those that are highly indebted or have low cash buffers,” the FSR said. “During this period, emergency measures that provide basic incomes to households and help businesses access credit are crucial.”

Government rescue efforts now exceed 10 per cent of gross domestic product, more than double the value of the fiscal stimulus deployed during the Great Recession a decade ago. Much of the assistance is in the form of emergency loans, and most of that funding is being administered by the biggest banks.

Canada’s banking oligopoly constrains competition and innovation in good times. But the Big Six and the hefty cash reserves they must maintain to satisfy federal regulations are a firebreak in this crisis. Things would be much worse if the banks were as fragile as airlines and oil companies. Fortunately, the banks should be able to withstand a deterioration of current conditions.

Policy-makers ran a simulation of what would happen to the six biggest banks — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank — if the Bank of Canada’s worst-case economic outlook came to pass.

That scenario, which the central bank acknowledges is plausible, involves a 30 per cent plunge in GDP in the second quarter from the end of 2019 and a slow recovery that would leave economic output below pre-crisis levels for more than two years.

It’s ugly, but the banks survived the test: arrears peaked at a rate that was about double the peak during the financial crisis, and non-performing loans would exceed recent highs. But monetary and fiscal policy counter much of the pain, and the banks’ reserves do the rest. Capital requirements remain above the level required by regulation, which was made tougher after the Great Recession precisely so the most important lenders would be ready for the next economic calamity.

“The six largest banks entered the COVID‑19 period with strong capital and liquidity buffers, a diversified asset base, the capacity to generate income and the protection of a robust mortgage insurance system,” the FSR said. “With these strengths, as well as the aggressive government policy response to the pandemic, the largest banks are in a good position to manage the consequences.”

Financial Post

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Canadian recession is likely without fiscal stimulus: Scotiabank


Canada is likely to fall into a recession this year unless the government moves ahead with robust fiscal stimulus as the economy takes a double hit from the coronavirus and tanking oil prices, according to the Bank of Nova Scotia.

Scotiabank is the first of the six largest Canadian banks to predict the country could be headed into a recession, though it believes the government will move quickly enough to avert one. A rapid rise in coronavirus cases globally, the sharp fall in oil prices and volatility in financial markets make a contraction in the second and third quarters this year “likely” in the absence of fiscal measures, Jean-François Perrault, chief economist at Scotiabank, said Wednesday.

“A reasonably mild recession appears likely unless timely and targeted fiscal measures are deployed in the very near future to deal with the economic impacts of the virus,” Perrault wrote in a research note.

Prime Minister Justin Trudeau released $1.1 billion in new funding earlier Wednesday in response to the virus, and said the government is ready to do more if necessary. Trudeau also said his government is prepared to use federal financing agencies to further stimulate the economy if needed, a measure that was deployed during the 2008-09 financial crisis.

But that may not be enough. Canada’s measures pale in comparison to those set out by countries such as Italy, which plans to spend as much as 25 billion euros ($28.3 billion) on stimulus measures. Perrault recommends the government roll out a fiscal package equivalent to one per cent of GDP, or just over $20 billion, in order to prevent the Canadian economy from going into recession.

The Toronto-based bank sees the country’s gross domestic product growth slowing to 0.3 per cent for the year in the absence of significant stimulus. Scotiabank’s isn’t the first bearish call to emerge this week in the aftermath of the oil price collapse but it does represent the most aggressive take yet on Canada’s future.

National Bank of Canada Financial and Royal Bank of Canada will release their forecasts later this week. Bank of Montreal was the first of the six banks to revise their forecasts lower this week, with a call for full year GDP growth at 0.5 per cent.

The latest stream of downward revisions include predictions that the Bank of Canada will cut rates to 0.25 per cent by June from its current 1.25 per cent. That’s in line with financial market expectations, according to overnight index swaps trading. The last time the Bank of Canada policy rate reached 0.25 per cent was in 2009. Earlier this month, the central bank cut interest rates by 50 basis points amid escalating coronavirus concerns, matching an emergency move by the Federal Reserve.

Here are the latest revisions from bank economists this week:

Scotiabank — Jean-François Perrault

Sees Canada’s 2020 GDP at 0.3 per cent in absence of substantial fiscal stimulus and 0.7 per cent if there is fiscal stimulus worth one per cent of GDP. Without fiscal stimulus, Q2 and Q3 GDP will contract. Expects the Bank of Canada to cut interest rates by 50 basis points at the next two meetings.

Bank of Montreal — Michael Gregory

Lowers 2020 GDP to 0.5 per cent from one per cent, and sees Q2 contracting by 3.5 per cent. Expects Bank of Canada to cut rates by 100 basis points over the next two meetings to 0.25 per cent.

JPMorgan — Silvana Dimino

Revises down 2020 forecast to one per cent or 1.1 per cent Q4/Q4 basis. Predicts no growth in Q2 and a two per cent rebound in Q3. Expects Bank of Canada to cut by 50 basis points in April with the “heightened risk” for an earlier emergency cut to zero per cent.

Goldman Sachs — Daan Struyven

Revises down 2020 GDP to 0.4 per cent or 0.2 per cent on a Q4/Q4 basis. Sees Canada on “verge of recession” with a zero per cent Q1, -0.5 per cent Q2, 0.25 per cent Q3 and one per cent Q4. Expects Bank of Canada to lower policy rate to 0.25 per cent by its June meeting.

 — With assistance from Erik Hertzberg and Kait Bolongaro

Bloomberg.com



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Canadian economy faces a prolonged period of sluggish growth


Canada’s economy is shifting into a lower gear as some of the country’s growth drivers begin to lose steam.

Statistics Canada will release third-quarter gross domestic product numbers Friday that will probably show a sharp drop in growth. According to the median forecast of economists in a Bloomberg survey, the country’s expansion slowed to a 1.3 per cent annualized pace in the three months through September, down from an unsustainable clip of 3.7 per cent in the prior period.

It’s a return to sluggish growth that may become the new normal for a Canadian economy seeing many of its engines of growth sputter, from investment and exports to weakening consumption as the nation’s households cope with high debt levels.

Beyond the third quarter, economists predict another 1.3 per cent reading in the final three months of 2019. Next year doesn’t look much better, with growth seen running at about 1.5 per cent in 2020. That’s a sufficiently prolonged period of below-potential growth for markets to anticipate the Bank of Canada will cut interest rates as early as January.

Canada’s exporters have floundered in the second half of the year. After a rebound in oil shipments temporarily boosted real exports in the second quarter, they’ve since flat-lined, falling 0.3 per cent since June in volume terms. Waning exports are also hitting manufacturers, whose shipment volumes decreased 1 per cent in the third quarter, led downward by oil and coal.

You don’t have a domestic demand story that’s strong

Brett House, deputy chief economist at Scotiabank

Business investment remains sluggish, down 22 per cent since oil prices began collapsing in 2014. While the Bank of Canada’s latest indicator of business activity ticked up, the central bank still sees investment as a 0.4 percentage point drag on 2019 growth. Until global uncertainty and trade tensions abate, Canadian businesses are unlikely to make major capital expenditures.

Consumption has long propelled Canada’s economic growth, but cracks may be forming, even with a robust job market and wages growing at the fastest pace in a decade. Economists expect consumption to pick up in the second half of the year, but that’s coming off a second quarter that was the slowest since 2012. The lack of vigour is most apparent in a retail sector that’s seen volumes flat over the past year.

“You don’t have a domestic demand story that’s strong,” said Brett House, deputy chief economist at Scotiabank.

One bright spot in the GDP numbers could be housing, which has rebounded as borrowing costs decline and buyers adjust to tighter mortgage rules. Home sales rose 7.3 per cent in the third quarter, the fastest quarterly pace since the end of 2017. Most economists estimate residential investment picked up for a second straight quarter.

Bloomberg.com





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