Canadian Capital Confidence Barometer - April-October 2013

Economic outlook

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Rebound in global economic confidence

Overall economic confidence has improved significantly from October 2012. In total, 81% of Canadian respondents view the global economy as either stable or improving — up from October 2012 (36%) and April 2012 (75%).

Global economic sentiment has improved across most countries. The US — often an economic bellwether — has also seen a significant improvement in its perspective on the state of the global economy.

As for local sentiment, Canadian respondents continue to show increasing confidence in the local economy, even more so than their US counterparts, perhaps not surprisingly.

However, respondents in some of the world’s other mature economies are showing a lack of confidence in their own economies, which has likely had an adverse influence on capital investment and transaction activity.

54% of Canadian respondents view the global economy as improving, compared with only 22% in October 2012

Confidence spans leading economic indicators

Canadian respondents’ increased confidence spans several leading economic indicators. At 50%, positive sentiment toward global economic growth is at its highest level in two years. Confidence around credit availability has also increased significantly over the last six months, and confidence in short-term market stability has more than doubled. But while Canadian respondents were more positive around employment growth (44%) and corporate earnings (42%) than they were six months ago, US and global respondents were significantly more confident than Canadians in these two areas.

Please indicate your level of confidence in the following at the global level

Please indicate your level of confidence in the following at the global level

These increasingly positive views, coupled with favourable sentiment about the regulatory environment for business growth, would normally signal an increase in both capital investment and M&A activity. However, confidence has not yet translated into action.

Low single-digit economic growth anticipated

In total, 77% of Canadian respondents expect to see growth in the global economy and 86% in the Canadian economy. However, most recognize growth is unlikely to reach the peaks last seen in 2006–07. The economic uncertainty that followed that period was so long and pervasive that typical cyclical behaviours have changed.

Global economic risks persist

Global market risks are well known by corporate boards. Slowing growth in emerging markets poses the most market risk to Canadian businesses and outweighs the US debt ceiling and eurozone challenges. While many companies have adjusted their strategies to compensate for these risks, others view them as a source of opportunity.

Job creation signals planned growth

Thirty-seven percent of Canadian respondents expect to hire talent or create jobs — an improvement from October 2012, but still behind US respondents. More encouragingly, plans for workforce reduction are at 13%, down from 20% six months ago — but again, this is behind US respondents, who indicate workforce reduction at only 6%, the lowest level in two years.


The growth dilemma

When does risk aversion itself become a risk?

Over several barometers, we’ve observed a disconnect between macroeconomic conditions and corporate action — improving confidence and fundamentals have not led to a rebound in M&A.

This corporate caution is understandable. The global financial crisis has been drawn out, with moments that suggested turnaround that never materialized. Amid this persistent crisis environment, the current generation of corporate leaders has largely pursued growth through organic measures or optimization efforts. They have generally been rewarded by boards for these conservative instincts.

However, we may be nearing the point where this sustained caution itself becomes risky. Organizations in search of growth may need to take an informed risk — to achieve their strategic objectives and to outpace competitors. First-mover advantage is a constant, even in today’s markets.

Leading companies are laying the groundwork to take action when the time is right. That means honing the Capital Agenda: fine-tuning the capital structure, defining core businesses, executing divestments when necessary and putting in place proper risk management and governance. Most important, it means answering the right questions: "Where do you want to grow?" "What will it take?"