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Planning for uncertainty 10 min read

Risk, recession, and rates: How businesses can rise above the uncertainty ahead

Economists are predicting a volatile year ahead. CWB's experts can help your business survive the worst of 2023.

As central banks fight generationally high inflation, interest rates have been rising and the economy is showing signs of slowing. As the new year begins, the risk of recession may loom large on the minds of Canadian business owners. How are they dealing with the uncertainty that defined 2022, and how can they prepare for the volatility that’s expected in 2023?

In this roundtable, three CWB experts from across the country – Senior Vice-President and Alberta Market Lead Dylan Watson in Calgary, Vice-President and BC Market Lead Jenny Siman in Vancouver, and Senior Vice-President, Central Canada and Automotive Finance Group Lead Mark Stafford in the Greater Toronto Area – share their insights and offer some advice for business owners looking to not only survive the next year, but thrive over the long term.

 

Q: How likely is a recession in 2023, and how severe do you think it might be?

Dylan: Inflation is still at levels we haven’t seen in decades. Nationally, the inflation rate is sitting at around 7%, which is well above the Bank of Canada’s (BOC) 2% target. The BOC, of course, has been raising rates aggressively, and if we consider broader factors – supply chain disruptions, war in Ukraine, the state of the labour market – there is certainly recessionary pressure. So, we expect to see a shallow recession in the coming year. But there is some risk to that outlook. A recession could be deeper, and we do expect to see continued volatility over 2023.

On the good news front, commodities have been faring well, and that benefits Canada in general. Over the next five to 10 years, we expect commodities to do well, specifically oil and gas  which is good for Alberta and the many businesses that either service or support the energy sector. And if we look at the BOC’s most recent 50 basis point hike (on December 7, 2022), that’s a reduction in the pace of quantitative tightening from the previous 75 bps hikes. We expect, however, to see higher rates for longer in the market.


Mark: I’m an optimist, and it’s clear the Bank of Canada used less hawkish language in its most recent rate increase, as far as the potential of future hikes is concerned. So, for business owners, that’s perhaps helpful for the decisions they’re trying to make for the future. For Ontario specifically, the GDP growth projection from the provincial government is 0.5% for 2023 – that’s a hair’s breadth from recession – and then 1.6% in 2024 and 2.1% in 2025. If you read between the lines, we should see stabilization and less economic uncertainty over the medium term – and that’s good for business.


Jenny: And more good news for businesses could be coming in the labour market. It showed signs of loosening in the third quarter of 2022, in part because some businesses have reduced job postings in anticipation of a recession. Given the economic and monetary contraction, we expect labour market tightness to continue to decline. On the other hand – and I’m thinking specifically of B.C., but it applies to other markets – housing is such a big area of concern. While we continue to see positive immigration into the province, housing affordability remains a challenge and higher mortgage rates have created lots of headwinds for what people can buy and afford. So, yes, I would say we will have tougher times ahead, but I’m also an optimist and I hope any recession will be soft and short in 2023.


Dylan: In Alberta, we didn’t get quite the run-up in housing that we saw in other areas of Canada through COVID, so we’ve seen relative stability in the market, and that’s expected to continue. 

 

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Q: How are the businesses you work with being affected by the rate environment and the slowing growth outlook?

Jenny: It really depends on the readiness of the company, the industry they are in, the competition they face, and their relationship with clients and suppliers. I would say many have acted in a prudent manner, and rightly so, by increasing their liquidity levels so that they can withstand the headwinds. For some others, it remains a challenge, and it’s situations like those when we really ramp up the communication.

I recently met with a client who has a great property rented to a retail operation that didn’t survive this year. The tenant vacated the property, and the property owner was left with an empty building. So, we had a fulsome discussion on how we could help. We came to understand the plan and what needed to be done, and in the end, we provided the client not only with more time to continue with the loan on the property, but also with additional funds to support them. By doing so, the client has time to attract another tenant and stabilize the property instead of being forced to sell an empty building – and empty buildings are more difficult to market to buyers.


Mark: The impact on businesses really does depend. Liquidity, debt levels, the strength of the balance sheet – all those things are very important. How are you structured coming into a recession? The less levered you are, the more flexibility you have in terms of handling increased costs. Are you able to pass on higher costs to your client base? In a fixed revenue business, that gets tough. On the other hand, the optimist in me says that this might be a good opportunity for a lot of our clients to say, ‘Well, I have a strong balance sheet, so is there some way I could grow my business by expanding or purchasing?’ For strong companies, this could be a time to buy.

Finally – and Jenny alluded to this – there’s the partnership you have with your bank. One of the things CWB does well is develop long-term relationships with our clients and provide value-added service. That’s especially important when there are economic pressures. When a business has that kind of partnership, they’re going to be less stressed because they know we will give them options to get through the ups-and-downs of the economic cycle.


Dylan: CWB has a history of supporting businesses through economic turmoil. There’s a great example in the pandemic. In February and March of 2020, when other banks were pulling back, we reached out to every single client – not by email or our website, but by phone – and asked them how we could support them. And we did.

Here’s an example of what that kind of support looks like today. A company we had done a little bit of work with – very successful, well-capitalized – was acquiring another very strong business within the same industry, but as the deal approached their primary lender wanted to change the financing structure to require a lot more equity from the purchaser. So, they called me and said, ‘Dylan, you wanted more of our commercial business – here’s your chance. You’ve got seven days.’ Thankfully, CWB is built to be nimble. We pulled the team together, got an offer out quickly, got it signed back and helped get the deal done. That’s what we do: provide the full strength of the financial services industry by wrapping a team of experts around our clients to ensure we’re meeting all their needs.

Mark: I’ve talked to so many business owners who haven’t heard from their financial partner in a year or longer, or they tried to call and can’t get through because there’s nobody to talk to. But our people are literally known for showing up at their door with the team approach that Dylan talked about. Knowing your business is supported is especially important when there’s uncertainty. You want to see somebody you trust, and you want to be able to talk to them. And when we show up, it’s not just one banker – it’s a group of experts that knows cash management, knows your industry and, most importantly, knows you.


Jenny: When we talk to our clients, we have genuine curiosity about their business and what their plans are. And now is the time for them to rethink and reassess those plans. I recently helped a client who had begun a transaction to buy an asset several months ago. Things have changed significantly since the initial offer to purchase. In particular, the cost of borrowing, which translates into how much they can borrow, how much down payment will be required and what the projected return on their investment will be. The client went back to the drawing board and essentially renegotiated the deal with the vendor. In the end, a new price was renegotiated, and the sale closed at a more than fair price. That was exciting for all parties.

 

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Q: So, in times like these, what should a business owner expect from their bank?

Dylan: When we’re meeting with clients, our difference is the ability to move faster and with more creativity and agility. We know that it’s imperative to provide good advice and that business owners want a strategic financial partner – so that’s our goal. One way we achieve that is by having ongoing conversations and an annual strategic planning session so we can address the owner or decision makers’ needs before they become critical needs. Very recently here in Alberta, we helped a client finance a horizontal integration in a very seasonal business. It required a lot of forecasting. We worked with an accounting firm to do that, and then our multidisciplinary team developed a forward-looking financing structure that the client didn’t even know was available in the industry. So, they’re very happy about it, and we’re happy to see them grow, and grow with confidence.

 

Q: Looking forward to expected volatility in 2023, what should business owners be doing to get prepared?

Jenny: We’ve certainly seen some repricing to insulate revenue from inflation. And of course, companies are also looking at their costs. For example, where can you reduce? Do you need all your office space, or can you pivot and sublet some of the space? Can you look at contractors rather than permanent employees? On our side, we often provided some relief on the debt payment side, which is only possible because of the open communication and the partnerships we have with our clients.

You know, a lot of businesses are still recovering from the pandemic, or challenged with things like supply chain disruptions, rising costs –you name it, there isn’t anything that’s cheaper today than it was before the pandemic. These issues aren’t just going away. Tomorrow is not going to get better if you do nothing different today. So, as much as we are proactive with clients, I think the clients who are proactive about their business are the ones who will manage well through a potential recession.


Mark: I would also urge business owners to reach out to key stakeholders – major customers, staff and, of course, your bank or capital provider. If you don’t talk to them now, you’re at risk of a surprise. The other part is, know your options. Access to capital always becomes harder in an economic downturn. Now is the time to buttress your balance sheet and know who your true partners are so you can ride it out with them. Also, look at your customers and make sure you’re happy with how your receivables are doing. Understand if the bulk of your business comes from a few clients, and if it does, make sure you know how they are doing. One of worst things we see is when a business suffers a working capital crunch because they can’t collect a receivable from a customer who’s in trouble.


Dylan: Plan for uncertainty. Stress-test your business model. Go through short-, mid- and long-term strategic planning. Don’t worry about forecasting for perfection because you can’t always factor in the true impact of economic shocks or uncertainty – but have a high-level forward view in place. And finally, make sure you’re aligning yourself with a good team of external professionals – your accountants, lawyers, bankers – so you can really get the forward-looking advice you need.