If there were enemies of growth for any medium-sized business, risk and uncertainty would surely top the list. It’s fair to say they’re probably entrepreneurs’ main adversaries in the current macroeconomic climate.
That’s because business owners are facing unusually high levels of business complexity that are poised to rise further in the months ahead. Worse, global economic headwinds are beginning to push back on their expansionary ambitions. Achieving success in 2020 will be dictated as much by managerial acumen as global events. The CEOs who embrace their responsibility to navigate through these stormy waters will emerge unscathed—the rest should keep their eyes on the rocky shores and churning currents ahead, and ready the lifeboats.
Of course, a cursory survey of current economic conditions in Canada would probably offer a rosy impression of the country’s finances, and allay fears of potential shocks ahead. Interest rates are under control, the loonie trades at a level that makes our exports relatively friendly but doesn’t apply much pain when taking a vacation abroad, unemployment is historically low and, while deficit spending is high, our national debt-to-GDP ratios are at reasonable levels. High fives all around? Not so fast. Several threats—most of which are global, even existential, in nature—are giving Canada’s business leaders sleepless nights and could dictate a potential march toward recession (or not) in the year ahead.
No-deal Brexit drama a major business distraction
On the indirect threat side of the risk ledger, we have Brexit, the United Kingdom’s drive to exit the European Union. That departure is currently set for Oct. 31, 2019, with British Prime Minister Boris Johnson promising that, come hell or high water, an exit will indeed happen on that date. MPs in Westminster—including many of Johnson’s Conservative colleagues—have other ideas. They’ve passed a law that blocks a no-deal Brexit and limits the PM’s options, but that doesn’t mean that Halloween won’t deliver a frighteningly chaotic pullout of the world’s fifth-largest economy from one of its most important trading blocs.
For Canadian companies exporting into the EU, many via the UK, no-deal is a major problem, at least in the short term. A disorderly exit would impact Canadian organizations’ trade and supply chain strategies and potentially even their ability to access crucial Eurozone markets. A no-deal scenario is supposed to see the automatic activation of World Trade Organization rules that will (at least in theory) govern UK trade with the rest of the world, but that transition will take time—potentially several months until fully implemented—before trade can resume as normal. Canadian firms could well be left in limbo in the meantime.
Global growth is slowing
Policy wonks are currently consumed by the details of an economic phenomenon that would lull even the most finance-minded business owners into a deep slumber. It’s worth waking up to pay attention, because at the moment, bond yield curves are inverted.
This means that long-term bond yields are lower than those for short-term bonds. That matters because the phenomenon is a very reliable predictor of recession. An inverted curve also tends to portend lower inflation rates and depressed long-term economic growth.
Still not convinced? European countries such as Germany, Italy and (not surprisingly given the current Brexit drama) the United Kingdom are seeing significant slowdowns in growth. Some economists are arguing that parts of Europe are already at, or nearing, recession. Interest rates on the continent are at negative levels in many jurisdictions, which is never good for business.
North American growth remains stable, but how long that trend can hold will likely decide your company’s near-term fortunes. As an aside, there’s also the lingering issue on our continent of the ratification of the new NAFTA, known as the US-Mexico-Canada Agreement. Neither Ottawa nor Washington have moved to pass the legislation that would bring the updated agreement into effect, and U.S. President Donald Trump could torpedo the entire process with a single impetuous pen stroke, throwing cross-border trade into disarray.
Trade wars, tariffs and Trump
Speaking of the mercurial American leader, it’s been clear for some time now that Trump has a penchant for using tariffs as a bludgeon to extract trade concessions. Case in point: his decision to slap aluminum tariffs on Canada due to hyberbole-driven concerns over national security. The problem now is that his combative instincts have landed the U.S. in an escalating trade battle with China, the world’s second-largest economy.
Prices for consumer goods are beginning to increase, as are the price of material inputs across the manufacturing sector. In short, the cost of doing business is rising and consumers are under greater financial pressure than before due in large part to counterproductive trade policies. In normal times this would be a concerning source of uncertainty, but more so when policy is seemingly being drafted by fiat (or tweet). The eventual outcome (and, hopefully, de-escalation) of the U.S.-China trade conflict is cited as one of the greatest risks to global economic growth, according to many leading economists and financial institutions.
Take defensive action, but don’t be afraid to play a little offence, too
While it may be tempting to pull the proverbial covers over your head and hope all of the macroeconomic madness goes away, business leaders simply don’t have that option. As always, we recommend being proactive and buttressing your firm’s finances to ensure you can sustain whatever financial body blows that global events throw your way.
Now would be a good time to sure up your balance sheet by paying down debt and increasing working capital reserves in case financing becomes more difficult to acquire, or demand for your products or services wanes due to circumstances beyond your control. Pay closer attention to several key performance indicators across your business such as accounts receivable turnover, current and debt-to-equity ratios, net profit margins, inventory turnover and even customer satisfaction levels. When they begin to slide into the red, make operational adjustments to return each to optimal levels.
But remember that even in the face of uncertainty and risk, opportunities can emerge for savvy business owners. Some of your competitors could fall on hard times if economic circumstances negatively impact their bottom line. This could create opportunities for mergers or acquisitions, or perhaps to poach talent or customers.
No matter what happens in the months ahead, business success is still very achievable. But getting there could mean weathering a few storms along the way.
Marshall Egelnick, Managing Partner