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BoC: Businesses Already Saw Declines in March

The Bank of Canada’s (BoC) quarterly survey of executives saw business sentiment had already begun weakening before COVID-19 worries intensified in Canada, especially in energy-producing regions. Some businesses polled again in mid-March reported a sharp decline in business activity, and many others were expecting it.

The Bank’s spring Business Outlook Survey composite indicator fell to -0.68 in the first quarter from 0.75 in the fourth quarter, based on interviews with about 100 executives during February 11-March 6. A follow-up round of interviews with a smaller sample of business executives conducted between March 13 and 17 found sales for businesses in some consumer-oriented businesses had collapsed, and energy firms reported a dramatic rise in financial stress as oil prices plunged.

“The smaller mid-March survey found the impact of the virus shock on firms was still escalating, with some firms seeing very recent sharp declines in demand and others only expecting them,” BoC said.

“Businesses in the accommodation, food services and recreation industries reported that their sales, orders and reservations had collapsed. Several firms had already closed or expected to soon close their operations due to declining cash flow. Non-food retailers reported a dramatic drop in foot traffic and were scaling down their operations. Businesses in these industries were drastically laying off staff or reducing staff hours in line with operations. However, some were also pivoting to new or less-developed business lines, such as food delivery and online sales, as a way to mitigate the negative effect on revenue. “

“Some manufacturers anticipated reduced demand from challenged customers. At the time of the consultations, they expected to temporarily shut down their operations and reduce their workforces. While some businesses in other industries (such as those tied to housing construction) had not yet been affected, most respondents indicated significantly more uncertainty about the demand for their products and services. In contrast, grocery retailers and related transportation services noted that their sales had reached unprecedented levels. They expected some of the surge to last as people continue to eat at home (instead of dining out) and purchase more cleaning products. Beyond weak demand, several businesses also said that the availability of some inputs, often from China and Italy, had been disrupted. Some firms mentioned that their access to Chinese-sourced inputs was gradually resuming. Retailers, particularly grocery stores, noted that they had not had significant issues with their supply chains. Finally, when asked about their upcoming capital expenditures, firms generally reported taking a wait-and-see approach. Almost all firms in hard-hit tourism-related and food services were cutting back on renovations and purchases of machinery and equipment or were placing investment plans on hold to preserve cash. Some firms in other sectors had not yet changed their investment plans since they had large investment projects already underway or had not intended to make new investments over the coming year.”

Based on responses to the earlier, larger BOS survey ended on March 6, “the sales outlook for businesses tied to the energy sector had weakened significantly because of falling oil prices. For other firms, notably in Quebec, domestic sales prospects were positive but had moderated,” the bank said. “Investment and employment intentions were modest. Businesses in the Prairies planned to cut back on their capital spending and workforces. Pressures on production capacity remained elevated in Central Canada, but eased somewhat overall.

Bank staff conducted a separate round of interviews with firms in the energy sector in mid-March amid concerns over the impact of the oil price war and COVID-19. “Many of these businesses reported that low oil prices were leading to financing and liquidity issues and were forcing them to reduce costs and operations,” the bank said. “The majority of firms viewed the current oil price shock as worse than the episodes of significant oil price declines in 2008 or 2015. This is because accessing financing has been more difficult and many businesses had been anticipating a bottoming-out in the sector rather than a negative shock. At the time of the consultations, the financial health across the sector had deteriorated significantly. Most businesses consulted had already experienced a tightening of financing conditions: equity prices had plunged, credit spreads had widened and risk appetite had disappeared.”

“While some firms reported being able to withstand a period of low oil prices (eg, they have strong hedging positions, a healthy balance sheet or low-cost operations), many had concerns about their ability to access financing. For their part, natural gas producers were partially insulated from the shock because natural gas prices were holding up. In this context, most firms reported major cuts to their capital budgets. On average, companies had revised their 2020 capital spending plans down 30% compared with 2019. In addition, significant staffing reductions were imminent, especially among oil-field service companies that employ a large share of the sector’s workforce. In contrast, at the time of the survey, most producers expected few layoffs because they were already very lean and it would be difficult to find additional efficiencies in the near term. Still, some producers anticipated having to cut their workforces if low oil prices persisted and, correspondingly, their production was reduced for an extended period of time.”

Julie Ros

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