The latest Bank of Canada Business Outlook Survey showed weakening business sentiment even before COVID-19 outbreak started to spread in North America. The “BOS Indicator”, a statistical summary of the survey, fell to negative territory (-0.7), down from 0.75 in January’s Survey. With the survey responses gathered between February 11th and March 6th, this barely scrapes the surface when it comes to COVID-19 concerns being reflected and renders most of the numerical responses obsolete.
However, the survey likely captures some (although not fully) of the oil price shock impacts, which started in February and accelerated in early-mid March. Indeed, according to the release, sentiment has deteriorated the most in energy producing regions. This quarter’s release also notably included two special sections focusing on: 1) the collapse in sales within consumer-oriented firms due to COVID-19, and 2) the economic and financial stresses in the energy sector. To reflect the abrupt change in the backdrop, these special sections were compiled through phone consultations carried out following the preparation of the survey.
The first special section of this edition included notable responses relating to the collapse in sales reported by consumer-oriented firms:
- Accommodation, food services, and recreation business reported a collapse in sales and orders, a reduction in operations, and layoffs. Some business reported a tilt to new business lines – namely online, in an attempt to rescue some revenue.
- Manufacturing business also reported reduced demand from customers. Most sectors, including still-unaffected business at the time, such as construction, reported increased uncertainty.
- A surge in sales to “unprecedented levels” was reported in grocery stores. Surprising perhaps to anyone who has visited one in recent weeks, grocery stores did not have any supply-chain concerns.
- Some supply chain disruptions were reported elsewhere, but firms relying on Chinese inputs reported a gradual resumption to normal.
- The hit to investment intentions featured most prominently in the most hard-hit sectors – namely tourism and food services. Other firms were cited as taking a “wait-and-see” approach.
The second special section focused on economic and financial stress within the energy sector:
- Financing and liquidity issues were cited. Firms also reported this shock as being worse than the 2008 and 2015 shocks due to financing constraints and the sudden negative shock that was largely unexpected.
- Some firms reported being able to withstand the shock temporarily due to hedging and low operational costs. Natural gas producers were reported as being partially shielded from the recent oil shock.
- Capital spending, on average, has been revised down 30% compared to 2019. Firms also cited impending layoffs.
- In terms of oil production, cuts did not feature prominently. Some firms mentioned a quick drop in conventional production, with others mentioning some offsets to declining production from previously planned projects. However, it is important to note that the survey predates the full collapse in WCS prices to single-digit territory (before modestly rebounding) and rising global storage capacity concerns. Indeed, some firms have already announced production shut-ins in some oilsands projects.
Key Implications
Today’s Business Outlook Survey will be mostly brushed off given its lagged nature. The survey still captures some of the oil price shock impacts, citing exacerbating regional divergences and weaknesses in the prairies. The release also shows a softening investment backdrop prior to the COVID-19 shock, consistent with the narrative that the Canadian economy was heading to the COVID-19 shock with weak momentum.
The special boxes are useful in gauging the impacts of COVID-19 on different sectors. Services sectors, as expected, appear to be disproportionately impacted. Although also undoubtedly affected, the scale of the impacts on other sectors such as manufacturing and construction remains largely uncertain. While expected, references to this oil shock being worse than 2015 shock is notable for the economic outlook of energy-producing provinces.
With duration being the wildcard, this introduces considerable uncertainty, and businesses are unlikely to invest until there is further clarity on the effectiveness of containment measures. We expect this variable to lag slightly behind in the recovery, namely due to the notable financing stresses being reported by energy sector firms.
With the unique nature of the COVID-19 shock and with the Bank of Canada already at the effective lower bound (0.25%), monetary policy has moved well into the realm of the unconventional. A suite of measures has already been announced from the federal government, with more support likely to come, especially in the form of targeted support to hard-hit sectors.
