Stock markets around the world have been swinging wildly up and down over the past month as big investment banks in the United States have declared bankruptcy or accepted buyouts to stave off financial failure. Wild markets, record percentage losses on the Toronto Stock Exchange and the shedding of 159,000 U.S. jobs in September have left many wondering if Canada is heading for a U.S.-style collapse.
“The domestic Canadian economy will slow but we don’t think it will collapse in the way the U.S. economy has,” said James Marple, an economist with TD Bank in Toronto.
This is because, financially, Canadian households and businesses are better off than their American counterparts, he said.
“However, in the near term, the export-related manufacturing sector will suffer the brunt of the U.S. downturn,” said Marple.
Job losses continue to mount in manufacturing. From January to August, that battered sector lost a net 14,000 jobs, according to Statistics Canada, and that’s a trend that will continue, said Marple.
But the export sector should recover as many resource projects come online next year, said Pedro Antunes, director of the Conference Board of Canada’s national and provincial forecasts.
“We should see a bit stronger growth next year in exports from the resource sector,” he said. With resources making up about one-third of Canada’s export sector, that growth should help boost exports overall.
But consumer spending is declining in the U.S., which has repercussions in Canada and around the world. Consumer spending represents about 75 per cent of the U.S. economy, which represents one-quarter of the global economy, said Antunes.
“When the U.S. is in such turmoil, there are impacts globally and we’re starting to see some of that already,” he said. “But it doesn’t feel that bad (in Canada) because employment is still rising, income is still growing. Relatively speaking, we’ve been doing fairly well.”
But Canada’s strong economy is dependent on commodity prices, especially oil, gas and minerals, such as potash and uranium. If commodity prices start to fall in response to lessened consumer demand, then the situation will worsen in Canada, said Antunes.
“There is the additional risk that this turmoil could lead to a more significant global slowdown and could take a lot of the shine off commodity prices going forward,” said Antunes.
There was a glimpse of that on Oct. 2 when the Toronto Stock Exchange fell 813 points to a two-year low as commodity prices weakened, and it fell below 10,000 points during a plunge on Oct. 6. However, commodity prices are up about 20 per cent from last year, said Antunes.
“That’s very strong growth and means that income effect should be very much in the cards for the rest of this year and provide some momentum to the wealth effect in our own domestic economy,” he said.
Unemployment rate expected to climb…
Looking ahead, as the domestic economy weakens, job gains won’t be as robust in the next year as they have been, said Antunes. The Conference Board predicts unemployment will increase slightly to 6.4 per cent in 2009.
TD Bank projects the rate of job growth will slow to 0.3 per cent in 2009 from its forecast of 1.5 per cent in 2008.
“It’s basically slowing right down along with the economy,” said Marple.
But the U.S. economy should start to rebound by the second half of 2009 and there will be increased demand for products, including commodities, which will boost Canada’s economy, he said.
…but labour market should remain tight
Regardless, employers will still have to deal with a possible labour shortage, said Antunes.
“Even if we do have slower growth this year and next year, I still think labour markets will stay relatively tight,” he said.
That’s because labour markets in many regions across the country are already experiencing shortages and an aging labour force will continue to put pressure on the labour market as a whole.
“HR managers still need to be positioning their company as a very attractive place to be because, at least at the moment, there are still other choices,” said Dave King, executive vice-president of staffing firm Robert Half International in Toronto.
Downward pressure on wage increases
However, with unemployment rising a bit in the short term, there will be a corresponding downward pressure on wage increases, said Marple.
“We’ve had very strong income growth on the back of commodity-based income gains and that’s also slowing. Wage growth will slow as we ride out this economic downturn,” he said.
Since 2004, real wages (after accounting for inflation) have been rising by about one per cent per year, said Antunes.
“That might ease a little bit this year, just because we’re seeing higher inflation numbers, but generally speaking real wages are going to stay fairly solid,” he said.
Canada’s financial sector solid
With investment banks in the U.S. closing down, from Bear Sterns in the winter to Lehman Brothers last month, there have been significant job losses in the financial services sector south of the border. But the Canadian sector won’t see the same kind of drop, said Marple.
“Our banks are in much better shape and we’ve had fewer losses than our American counterparts,” he said. “We’re a lot better off. We’re better shielded (from job losses).”
However, hiring will likely slow as profit margins drop, he said.
But that’s not happening yet with 38 per cent of finance executives surveyed by Robert Half saying they were planning to increase hiring in the last quarter of 2008, but that could change, said King.
“There’s so many unusual pressures on the market and so much media hype, it’s hard to say what’s going to happen day to day, let alone month to month or quarter to quarter,” he said. “It’s a shifting landscape every day.”
While there’s been no change in compensation for finance professionals yet, that will probably change when firms hire new executives in the future, especially with the realization in the U.S. that executive compensation is too often tied to short-term goals that can hurt the organization in the long term, said King.
Pensions and the market
What does the credit crisis mean for pensions?
A $700-billion US bailout from the United States government has done little — as of
Canadian HR Reporter
’s press time — to stabilize stock markets thrown into a tailspin by the U.S. credit crisis. This, understandably, has employers and employees worried about pension funds.
Market fluctuations have cost 125 major Canadian employers about $10 billion in pension assets, a loss of six per cent to seven per cent of the value of assets in pension plans since the start of the year, according to pension consultants at Mercer Human Resource Consulting in Toronto.
However, employers with defined benefit (DB) plans shouldn’t panic just yet, said Rob Vandersanden, senior retirement consultant at Hewitt Associates in Toronto. Unpredictable markets mean many of these companies could recoup their losses before they have to do asset valuations and either increase contributions or decrease benefits to account for any shortfall, said Vandersanden.
“The ones that do have to do a valuation at the end of this year are concerned they’ll have to put more money in than they had originally planned for earlier this year,” he said.
Those employers should look into their options if their liabilities outweigh their assets, said Vandersanden. This could include a letter of credit for employers in Quebec, Alberta and British Columbia.
An employer could also try to get special dispensation from the regulator to do a valuation based on the assets and liabilities from the year before, which would buy employers three years to shore up assets, said Vandersanden.
However, the effects on DB pensions are starting to be felt. The Ontario Teachers’ Pension Plan announced it is cutting back on inflation protection for future retirees to eliminate a $12.7-billion funding shortfall reported earlier this year.
If the markets don’t reverse themselves in the next few weeks, and the chances of that are about 50-50, then the ramifications for pensions will be significant, said Moshe Milevsky, a finance professor at the Schulich School of Business at York University in Toronto.
“In the long run it might become more expensive for all of us to get pensions and to provide pensions,” said Milevsky. “At the extreme, we might have to see changes to the way the Canada Pension Plan is structured.”
Employers with defined contribution (DC) plans need to communicate with employees to remind them retirement plans are long term, said Zaheed Jiwani, a senior investment consultant at Hewitt.
“There’s always going to be short-term volatility,” he said. It’s also important to remind employees to ensure their portfolios are diversified, he added.
However, for those retiring in the next few years, the fluctuations could have a significant impact on their retirement income, said Jiwani.
To protect themselves, they need to evaluate their asset mix and move away from equity and stocks into safer investments such as the fixed income market, he said.
That’s why plan sponsors should consider offering target date funds, which automatically transfer investments from higher risk to lower risk as members near retirement. Plan members can also purchase insurance that will protect their investments if there’s a shift in the market, said Jiwani.
Employees should also consult with an investment specialist to ensure their investments will provide them with the income needed for retirement, said Milevsky.
“Just like you don’t do surgery on yourself, I don’t think you should do asset allocation and product allocation on yourself,” he said.
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