Oil prices, interest rates fuel concerns - Business leaders say stronger dollar bodes ill for economy
www.nationalpost.com Paul Vieira Financial Post
The combination of higher interest rates, soaring energy prices and a stronger dollar are each contributing to pessimism among Canada's business leaders over the country's economic fortunes, a survey suggests.
About 60% of corporate executives indicated in the latest instalment of the Financial Post's CEO poll that the combination of the three will have a negative impact on the Canadian economy, compared to 20% who suggested a positive effect. The remainder said either there would be no material impact (17%) or did not know (3%).
"There was some concern -- about interest rates, oil prices, and in that context, the Canadian dollar," said Conrad Winn, president of COMPAS Inc., which conducted the poll.
"And in the context where oil prices will impact on the American economy, and therefore, by inference, on the Canadian economy, rising interest rates and a rising Canadian dollar would not be helpful, because we rely on the U.S. market so much for exports."
New data released late last week suggest the U.S. economy is facing renewed difficulties, as U.S. consumer confidence hit its lowest level in more than a decade and the country's producer price index climbed 1% in February, largely due to increasing energy costs.
Canadian chief executives are most concerned about the potential drag that high oil prices and interest rates will have on the economy.
The price of a barrel of West Texas intermediate crude has recently reached heights not seen since the Persian Gulf war of the early 1990s, largely because of a strike in Venezuela and possible military action in Iraq.
Of the business executives surveyed, 68% suggested rising energy costs would have a negative impact on the economy, compared to 13% who said it would be a positive, given Canada's energy-rich economy.
Said one respondent: "Care should be taken not to assume that economic benefits flowing from rising energy prices ... will necessarily offset more immediate and negative effects of higher energy prices on the majority of Canadian businesses, whether in the form of higher production costs or simply as consumers shift more of the disposable dollars in their pockets" from buying goods to paying higher energy bills.
Also, CEOs expressed concern over the Bank of Canada's recent move to increase interest rates.
About 58% of business leaders said raising interest rates would have a negative effect on corporate performance, with only 14% saying it would be positive.
This month, David Dodge, the central bank governor, raised the bank rate, the interest rate it charges commercial banks, to 3.25% from 3%, in an attempt to cool inflation.
Moreover, the central bank said further increase are on the way, even though there are worries about a slowing economy and a possible war in Iraq.
The increase in interest rates, and the overall performance of the Canadian economy, has helped push the country's dollar upward. But that is of concern to CEOs as well, given export-oriented companies benefited from a low loonie.
"A reasonable inference is that a stronger dollar, on its own, is not enough to instill confidence in business leaders," Mr. Winn said. "The underlying economic circumstances appear to be as important to fostering confidence as the performance of the dollar itself."
The Web-based survey of CEOs, sponsored by the Canadian Chamber of Commerce, was conducted between March 11 and 13 and involved 155 business leaders. This study of Canadian business leaders is considered more accurate by COMPAS than other surveys of the same size, as it is drawn from a smaller community., Similar surveys of 155 respondents drawn from the general public are deemed accurate to within approximately eight percentage points, 19 times out of 20.
FP CEO POLL:
- Some economists have been forecasting near-term growth in energy-rich provinces as a result of rising energy prices. To what extent are rising energy costs affecting business positively or negatively? Please use a 7-point scale where 7 means very positively and 1 the opposite.
Very positively 7 6 5 4 3 2 1 DNK Very negatively
7: n/a 6: 5% 5: 7% 4: 15% 3: 32% 2: 27% 1: 9%
DNK: 5%
- The Bank of Canada is raising interest rates out of concern about rising energy costs and possible inflation. How will rising rates impact corporate performance? Please use a 7-point scale where 7 means very positively and 1 the opposite.
Very positively 7 6 5 4 3 2 1 DNK Very negatively
7: n/a 6: 3% 5: 10% 4: 22% 3: 33% 2: 19% 1: 6%
DNK: 7%
- The Bank of Canada predicts that the loonie will rise against
the U.S. dollar as a result of the increase in interest rates. How will the combination of a stronger dollar, higher energy prices, and higher interest rates impact the Canadian economy? Please use a 7-point scale where 7 means very positively and 1 the opposite.
Very positively 7 6 5 4 3 2 1 DNK Very negatively
7: 4% 6: 3% 5: 13% 4: 17% 3: 29% 2: 19% 1: 12%
DNK: 3%
- There are various opinions about why our dollar is strengthening. Which of the following opinions best describes your view:
Our dollar is rising because of our inherently strong economy. 32%
Our dollar is strengthening because we are an energy-rich country and this is a time of Middle East-related uncertainty. 31%
Our dollar has been historically undervalued and only now does the market realize its true value. 30%
Quebec and national unity are less of a concern today so the market is recognizing our domestic stability. 3%
DNK/No opinion 3%
The full technical report and data not graphically displayed above are available at www.compas.ca. Letters on the substance of the issue are welcome at letters@nationalpost.com, while letters on survey methodology are welcome at National_Post_Survey@compas.ca
Source: COMPAS Inc., National Post
pvieira@nationalpost.com; The analysis in the poll is that of COMPAS. Those views are not necessarily held by the poll's sponsor, the Canadian Chamber of Commerce. This weekly poll is presented in partnership with Canadian Chamber of Commerce