Domestic spending drives the recovery in Canada

According to the latest Crédito y Caución Barometer, some 32% of Canadian companies surveyed assessed domestic payment behaviour as poor or fair.
Analisis Credito y Caución
Madrid - 01-fev-2010

The Canadian economy began edging out of recession in the third quarter of 2009. Statistics Canada indicated that real GDP grew by 0.1% compared to the previous quarter: the first quarterly gain since Q3 of 2008. Manufacturers remained under pressure as goods-producing industries’ output fell in Q3 of 2009 for the ninth consecutive quarter, but September did showthe first monthly rise since July 2008. Canada's manufacturers and exporters continued to be hurt by the strong Canadian dollar versus the US dollar, and weak US demand. Exports and imports both grew in volume after several quarters of decline, but imports grew far faster than exports.

This increase in consumer spending, resulting in increased consumer debtm could pose a hurdle to recovery, as consumer confidence remains fragile due to a weak labour market: the unemployment rate remains high at 8.6%. Short term increases in unemployment or rising interest rates could push more consumers over the edge, further compounding the already high number of consumer bankruptcies. Overall bankruptcies increased by 43% in September; with consumer bankruptcies increasing by a staggering 47.4%. That said, and surprisingly, business bankruptcies declined by 0.4%.

In October, the Expected Default Frequency (EDF) indicator in Canada again dropped compared to the previous month, continuing its eight month decline, and ending 317 basis points lower than at its peak in February 2009. While generally decreasing, the current Canadian levels remain more than two times higher than in the summer of 2008, still indicating elevated default risk among listed companies.

According to the latest Crédito y Caución Barometer, some 32% of Canadian companies surveyed assessed domestic payment behaviour as poor or fair. For domestic sales, the average payment took 41 days in the summer of 2009, an average delay of 8 days beyond due date. Payments from foreign business partners took, on average, 45 days, 12 days longer than the average contractual term of payment.

In 2010 growth will range between 2-3%

Canada’s economic outlook is improving. With household and financial institution balance sheets stronger than in many countries, the Canadian economy is expected to resume expansion in 2010. The revised forecasts for the economy have pegged Canadian GDP growth to range between 2% and 3% for 2010.  Inflation is not expected to be a problem in the short term. Canada’s year-on-year consumer price index has moved above 0% again after spending the previous four months ‘under water’. With the labour market expected to remain weak, resulting in declining incomes and rising unemployment, this should further assist in keeping inflation in check as companies providing goods and services will be restrained in how high they can raise prices.

Current data indicates that an upward adjustment of commodity prices is underway, due to the success that China is having in getting its economy back on track, and, as Canada’s economy is resource/commodity driven, these increased prices will further boost the recovery.

Spotlight on industries in Canada: Oil, gas and Agri-Crop

The global economic downturn has reduced demand for energy which has resulted in over-supply and downward pressure on pricing. Companies in this sector have responded by cutting production and curtailing capital expenditure on new and existing projects. As companies in this sector reduced short term capacity, payment defaults showed a marked increase. Corresponding with these payment delinquencies, bankruptcies in this sector have increased by 15.2% in Q3 of 2009.

Crédito y Caución’ short term outlook for the oil and gas Sector is positive. As the global economy rebounds, the demand for oil and gas has improved. This is borne out by recent energy price advances that have resulted in increased production and capital expenditures. Sellers to this sector need to be aware of the end use of the products they supply, so they can be more aware of the issues that buyers may encounter. For example, suppliers into new construction, which is entering a declining demand cycle, could face the prospect of project delays or cancellations resulting in collection issues.

The economic downturn has also lowered demand for meat and dairy products and, in turn, this has resulted in lower feed crop consumption and less demand for crops destined for livestock feed. Compounding the demand issue, Canadian agri-crop participants have been challenged by difficult weather conditions negatively impacting crop yields and crop quality. This reduced demand and lower pricing have led to sector participants managing down costs – for example, by reducing the use of crop inputs such as fertilizer.

Crédito y Caución’ short term outlook for the agri-crop sector is stable. As global demand develops, pricing should rebound. If crop yield and crop quality improve, this sector should move to a positive outlook and fully benefit from the recovering global economy. Despite the current challenges, there has been little evidence of payment defaults or that insolvencies have increased. However, it is important to note that, due to the significance of this sector, government stimulus has been provided, and has probably been instrumental in stabilizing credit quality. Also, the trading terms in this sector are quite long and collection issues could take many months to materialize.

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