24th annual Queen’s Business Forecast Luncheon attracts record audience
December 08, 2005
Each of the panelists considered the economy’s prospects from the perspective of their own particular expertise. John McHale reviewed economic prospects for 2006, touching on the issue of high energy prices. Lynette Purda focused on the financial markets outlook for the upcoming year. Douglas Reid took a look at the business strategy outlook for 2006. And finally, Ken Wong examined Kingston economic development from a city marketing perspective.
Economic prospects for 2006 are generally favourable. However, this year’s forecasts come with more than the usual number of caveats. Volatile energy prices buffeted the economy in 2005, and are likely to do so again in 2006. All things considered, the panel predicts that real GDP growth will grow by 2.9 percent in 2006 and the unemployment rate will climb slightly to 6.6 percent from its current 6.4 percent. Demand growth is likely to be supported by a post-election fiscal stimulus, but held back by steadily rising interest rates. The panel anticipates that the Business Prime interest rate will reach 5.75 percent by this time next year. Inflation is likely to moderate towards the Bank of Canada’s 2 percent target as the effects of this year’s oil price increases fade. The exchange rate is likely to stay in the vicinity of US$0.86—the highest level it has traded at since 1992.
The story in financial markets for 2006 will revolve around increasing interest rates. The question in North American markets appears to be not whether rates will rise but how quickly and by how much they will increase. Stocks will be bolstered by continued economic growth in both the US and Canada which will be aided by strong consumer spending in light of recent wage increases. Rising interest rates however will temper any significant gains. While energy prices will not reach their post-Hurricane Katrina highs in 2006, resource companies should continue to outperform in the upcoming year. A word of caution regarding oil and gas royalty trusts is merited. While a Liberal government has made promising commitments towards pro-investor tax reforms, caution should be exercised until these commitments are implemented. 2005 has shown us that uncertainty with respect to the taxation of income trusts can have a devastating impact on the market value of these investment vehicles.
Business Strategy Outlook
Securing growth remains the dominant business strategy challenge for 2006. Consequently, expect to see the volume of M&A activity to increase, though at smaller average deal size. Poor innovators will be punished by customers seeking lower prices for goods produced offshore, making those companies more liable to takeover by larger enterprises seeking to consolidate industry power. Most firms have coped with the threat of the "China price" by redesigning their value chain systems, relieving margin pressure, but this effect is temporary and will be internalized by markets within a year. Hence, expect more initiatives to raise base prices in the coming months. Continued attention on strategy implementation has paid off, though Canadian companies still are at a considerable disadvantage in terms of productivity versus US and many international companies. Internationalizing sales should increase and there is considerable evidence that companies with strong export positions have competitive advantage domestically. The "sleeper" issue for companies in 2006 will be resilience - how to harden their supply chains and redesign their production systems to prevent the damage that systemic uncertainty could bring, via gasoline supply shocks, pandemics or terrorism.
The forecast for the local economy is mixed. Despite the recent reports that suggest Kingston to be one of the fastest growing and most active for small business, the prospects going forward are not strong. Compared to 2005, performance will be down in every major category. Most noteworthy is a decline in GDP growth from 5.5% to 2.3%, housing starts down from 800K to 700K and retail sales growth down from 8.4% to 2.6%. Worse yet, whether these forecasts are met is almost completely dependent on government - infrastructure, LVEC (Large Venue Entertainment Complex), the proposed “quad-pad” etc - and institutional spending by Queen's and KGH. While these mostly publicly funded initiatives may provide a base for reasonable performance over the short term, the fundamentals for longer term prosperity - population growth, commercial and industrial tax base, age distribution of the population - are not supportive. Tax increases are inevitable to make up for the under-spending ways of previous councils: Kingstonians must decide whether they prepared to go above those to invest in building stronger fundamentals.
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