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October 6, 2020

It’ll get worse before it gets better: Results from Alberta Business Expectations Survey

In September, the Business Council of Alberta conducted its inaugural Alberta Business Expectations Survey (BES)—a new quarterly tool to assess forward-looking trends in business conditions and economic expectations in the province.

This survey captures the perspective of BCA’s strongest asset—our member businesses who are among Alberta’s largest and most dynamic companies. They account for a significant share of economic activity in the province and, as such, their expectations play an important role in setting the direction of the provincial economy.

The timing of this inaugural survey was both a challenge and an opportunity. On the one hand, these are far from normal economic times. We have no status quo against which to compare our results. On the other hand, we gain a unique insight into the economic recovery and the road ahead. As they look ahead, how optimistic are Alberta’s leading companies? Do they expect business to pick up?  Are they planning on hiring more workers? Are they thinking about investing in their own future? In other words, do they see brighter days ahead after a long and painful struggle through the shutdown?

They do not.

The results from our first survey paint a troubling picture of the short-term future for the Alberta economy. To be fair, in an economy struggling to recover from an oil price crash in February, the COVID-19 economic shutdown, and an uncertain policy future for the energy sector, we were not expecting a lot of optimism. However, we did not get the sense from our results that businesses think the worst is behind them.

Every indication suggests that we are in for a long, slow and painful recovery. Things may yet get worse before they get better.

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Survey Results

Broadly speaking, the BES asks questions in three general categories of business activity: past sales and future expectations; investment plans and credit access; and employment and access to labour. We highlight some of the key findings below.

Where applicable, we use a “balance of expectations” approach to analyzing the data. Effectively, what this means is that we focus on the gap between businesses who think a certain indicator will improve and those who think the opposite. For example, we ask in the survey what businesses expect their employment level to be in the next 12 months: higher, lower, or about the same as it is now. The balance of expectations is the percentage of firms reporting that employment will be higher minus the percentage reporting that it will be lower. The more positive the balance, the more overall optimism we see about future hiring. The more negative the balance, the more pessimism we see.

What is the Business Expectations Survey?
The Business Expectations Survey is a new tool developed by the Business Council of Alberta to assess current and future economic conditions in the province. Modeled after the Bank of Canada’s Business Outlook Survey used to guide interest rate policy decisions, the BES is a member-based survey that captures the perspective of leading Alberta CEOs on the short-term economic outlook for the Alberta economy.

The survey itself consists of nine questions about previous and anticipated trends in sales, investment, employment, and credit conditions. It was in the field from September 10th to September 28th. Our first survey received 43 responses.

BCA will be conducting, and reporting on, this survey on a quarterly basis. The questions will not change over time, allowing us to track shifts in business sentiment, investment, and hiring plans. As time passes, we will build an evolving story of economic activity in Alberta and future growth expectations for the province.

Sales Activity

On balance, the results from our questions on past sales and future expectations reflect the struggles associated with the economic shutdown and point to a slow recovery.

Unsurprisingly given the current economic context, the vast majority of businesses (65%) experienced a slowdown in sales activity over the last year. On the positive side, nearly 28% stated that growth was stronger, but the result was a solidly negative balance of expectations of -37%.

In terms of future sales expectations, about 40% of businesses say they expect sales activity to pick up in the next 12 months. Meanwhile, just under 12% expected sales to decelerate, while nearly half (48%) expected sales to stay about the same. These numbers result in a positive balance of expectations of about 28%.

Source: Business Council of Alberta

Finally, on the question of new business activity coming down the pike, about 62% of respondents said that their new orders, advance bookings, sales inquiries, and other indicators of future business activity are down. Only 21% said that they had improved, while 17% said they were the same. These figures result in a balance of expectations of -40%.

Source: Business Council of Alberta

Even though businesses have a positive balance of expectations for future sales activity, these latter two results point to a slow recovery in Alberta. Our survey took place at a time when businesses were struggling with reduced demand, capacity restrictions, employees working remotely, and new COVID-19 health and safety restrictions. In that context, nearly half of respondents expect future sales activity to be the same as it was during those unusually depressed levels; and 62% are not seeing any increase in new business opportunities on the horizon in spite of an exceptionally low starting point.

Investment and Credit

With a struggling economy and slower sales, businesses are scaling back their investment activity. More than half (53%) of survey respondents stated that their spending on machinery and equipment would be lower in the coming year than it was in the previous year. About 21% said that it would be higher, while 26% expected it to be the same as it was last year. The balance of expectations on investment in machinery and equipment was about -33%.

Source: Business Council of Alberta

Businesses are also reporting that they are having a harder time raising capital. Nearly one-third of respondents said that credit market conditions have gotten tighter, 19% said they had eased, and a plurality (49%) stated that their ability to obtain financing is about the same as it was a year ago. On the whole, a positive balance of expectations of 14% suggests that businesses could be facing higher borrowing costs or a decrease in market receptivity to new equity or bond issues.

Source: Business Council of Alberta

These results suggest that federal government efforts to expand access to credit for large businesses have not been entirely successful. While it is impossible to know what businesses would have reported in the absence of federal supports, the fact remains that more businesses are reporting tighter borrowing conditions than not, even with the introduction of several government programs aimed at ensuring liquidity in financial markets.

Employment

Finally, the BES asked businesses a number of questions about their hiring plans and their ability to access the right labour and skills. While questions about labour and skills shortages are normally an important issue for business competitiveness and productive capacity, they are of less concern in an economy still getting back on its feet. Not surprisingly, most businesses (62%) are reporting that they have an easier time finding the people they need now compared to a year ago; and a clear majority (79%) report that they are not facing any present-day labour shortages that are impeding their ability to meet demand. Even so, it is worth noting that even in spite of Alberta’s weak economy, nearly 10% of businesses report worse labour shortages today compared to a year ago, and 28% have seen no improvement in their ability to find the workers they need.

Moreover, as the economy slowly recovers, there are unanswered questions about how quickly Canadians will be returning to work. A forthcoming BCA commentary will examine the revamped Employment Insurance (EI) program and the new suite of recovery supports introduced by the federal government, including the risk that the structure of those supports creates a disincentive for part-time workers to return to the job market.

In addition, the fact that a majority of businesses report an easing of labour shortages is not simply because there are more people available. With sales down and future expectations low, many businesses simply do not have as much work to go around as they did in the recent past.

Source: Business Council of Alberta

In fact, this negative outlook for future growth is directly related to the most troubling finding from our survey—the state of business hiring expectations for the coming year. Only about 25% of businesses expect to add workers over the next 12 months, while a full 47% expect to employ fewer people a year from now. With 28% expecting employment to remain at status quo levels, that results in a balance of expectations of -21%.

In other words, companies expect that, given current economic conditions and challenges, they will be forced to lay off more workers in the coming months. This would be a concerning finding at the best of times, but it is especially troubling given that, as of August, there were still 164,000 fewer Albertans with a job than there were in February before the shutdown began. This negative hiring outlook suggests that the unemployment rate, which sat at 11.8% in August, is not likely to dip below double-digit levels for quite some time.

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