Should manufacturers brace for recession in 2023? Are interest rates having an impact on equipment purchases? Alan Arcand, chief economist with Canadian Manufacturers & Exporters, answers these critical questions and more in an exclusive interview.
SHOP: What are you expecting in terms of business conditions for 2023?
ARCAND: Even though manufacturers are optimistic, things are slowing. Business conditions are not going to be as favourable next year as they are this year. Rising interest rates will slow growth across the world. The odds for a recession in Canada are probably increasing, because interest rates are being raised here and in the U.S., which is our most important market. The Fed has pretty much signalled it will tackle inflation at any cost. So, if you think of Canada’s most important export market going into recession next year, that’s not going to be great news for manufacturers. Offsetting that, if there is going to be a recession, it looks like it’s going to be mild and probably short lived. It’s not going to be of the magnitude we saw during the depths of the financial crisis in 2008-09 or during the start of Covid. So that probably explains why business confidence has not gone down as much as would have been expected.
SHOP: Is the concern about inflation strong enough that the central banks are willing to risk recession?
ARCAND: Yes, they are. They are very concerned about inflation. They don’t want a situation where people are expecting inflation to stay high for a long time. That gets brought into wage agreements which force companies to raise prices and that’s a spiral they want to stop because they understand how damaging runaway inflation can be. They are trying to avoid a recession, but they would argue runaway inflation is worse than a small recession.
SHOP: You mentioned a recession in 2023 would be short-lived. How short-lived could it be?
ARCAND: Central banks and governments have gotten better at putting policies in place to offset the effects of recession, such as cutting interest rates and bringing in fiscal stimulus. We are getting better at managing economic cycles. It doesn’t look like it’s going to be anything too dramatic. Every recession isn’t the same. Each one has its own characteristics. In 2008-09 banks were failing, when the first Covid wave broke out people were panicking and didn’t know what would happen. The last two recessions we went through scary times. This one seems more a case of cutting growth back to cool inflation down. We know the story of what’s happening with this one so it’s less scary.
SHOP: Are high interest rates having an impact on capital purchasing or growth plans?
ARCAND: Talking to members I haven’t heard anyone discussing the issue of higher interest rates affecting their investment decisions. In theory higher interest rates should cause people to spend less but I think businesses are less sensitive to interest rate changes than households are. Canadian homeowners have high debt loads given what’s happened with the housing markets over the past few years so that’s really where interest rates will slow things down and you can see that already with the housing market going much lower and that has spinoff effects on home renovations, etc. That’s really where the impact is going to be. There may be a small impact on business investments, but businesses tend to have a longer term view of things.
SHOP: CME believes the government should focus on boosting manufacturing production as a way to help reduce inflation. What should government be doing to help manufacturing increase production?
ARCAND: It’s about reducing the barriers to businesses investing in growing their operations. A lot of it is helping to alleviate the challenges manufacturers are facing with the supply chain and labour and skills shortages. Job vacancies in manufacturing remain at record levels. If manufacturers could fill those positions, we could increase production to meet the demand that’s out there for goods. The supply chain issues are more long term, but government needs to focus infrastructure to help ease the movement of goods and people.
SHOP: CME is also asking for a more favourable environment for business investment. What should government be doing?
ARCAND: The government is thankfully looking at this more closely. If you look at the budget this year there was an emphasis on improving the country’s innovation investment performance and creating an environment that encourages business investment. The data over the last number of years shows manufacturing investment has been pretty soft, especially in comparison to the U.S. That’s a huge challenge. Manufacturing is almost 10 percent of GDP in Canada and if manufacturing companies aren’t investing it’s holding back the entire economy. We need partners in government to improve the business environment in Canada. So one of the things we talk about is the Trudeau government’s investment tax credit. It only applies to Atlantic Canada for manufacturers, and we’ve asked that it be extended to the whole country. The government also brought in an accelerated investment incentive in response to the tax cuts the US brought in during the Trump administration. It was immediate expensing of purchasing of manufacturing equipment. That incentive is set to wind down, but we are hoping the government will extend the program, especially since much of the time the incentive was in place we were in the middle of a pandemic and investment was halted given all the uncertainty.
SHOP: What is your advice to metalworking company owners as they prepare for 2023?
ARCAND: Plan for the fact that economic growth will be subdued next year because central banks are focusing on higher interest rates to fight inflation, but I don’t think it’s going to be anything severe. Take a longer-term view. Things will start picking up by the middle of next year so don’t adjust your plans too much based on a temporary slowdown given how long it can take to ramp up again to meet new demand. That’s what happened during the COVID slowdown. Companies were surprised by the speed of the recovery and that’s part of the reason there was so much excess demand. It took companies a while to get things rolling again.
For more insights from the industry’s most influential leaders about what to expect in 2023, see the November issue of Shop Metalworking Technology.