Queen’s School of Business faculty expect economic recovery to finally take hold
December 6, 2013 – KINGSTON, ON – Canadians can expect modest growth and continued caution in 2014, advised Queen’s School of Business faculty at the 32nd annual Business Forecast Lunch held today in Kingston, Ontario.
Panel members also predicted continued low interest rates and a steady Canadian dollar. But despite the fact that the economy is moving in the right direction, a cautious business community will likely shy away from capital investment. In terms of the financial markets, the panel predicts that the current trend of earnings growth based on cost cutting is not sustainable. Highly leveraged Canadians may feel amplified effects of the U.S. Federal Reserve’s tapering of quantitative easing.
Operationally, 2014 will be more about implementing effective operations than developing elaborate strategies. This year a faculty expert brings a new perspective on healthcare, exploring the implications of Ontario’s new governance model.
Panel moderator and finance professor, Lynnette Purda, revealed that two of the panel’s five 2013 predictions were spot-on, including a GDP growth rate of 1.9% and an interest rate prime at 3.0%. Unemployment rates for 2013 came in at 6.9%, just shy of the predicted 7.2%. The Canadian dollar was less predictable. The forecast estimated U.S. dollar parity, but the latest financial reports posted $0.94.
Finally, the largest variance was with the panel’s anticipation that the inflation rate would rise to 1.8%, when it actually fell to 0.7%. “This dip can be attributed primarily to a decrease in gas prices,” explained Purda.
A summary of each panelist’s 2014 presentation is included below.
“Overall, there is greater optimism that the long promised recovery from the financial crisis is finally taking hold,” said Lynnette Purda, Associate Professor of Finance and BFL panel moderator.
The strong, real GDP growth witnessed in the third quarter of 2013 holds promise for Canada’s economy in 2014. Despite some positive indicators, however, businesses remain cautious and continue to delay or scale back capital investment, Purda explained.
Continued growth for Canada in 2014 requires increasing exports, though this is dependent on growth internationally, particularly in the United States. If U.S. growth continues, the Canadian dollar will likely remain low in 2014, providing a much-needed boost to exports and manufacturing. Such a boost would pull Ontario closer to national growth levels and provide modest improvements in employment.
Growth in Kingston continues to lag the national average due to the city’s reliance on the public sector. Purda is optimistic that improvements to the Ontario manufacturing sector and overall economic growth will benefit Kingston.
“The lower Canadian dollar and increasing consumer confidence may also boost local tourism. Ultimately, long-term growth for Kingston has to come from industry and private business.”
Financial Markets and Investment Outlook
In a review of the financial markets, Ben Goharian, CEO of the Queen’s University Investment Counsel (QUIC) and a fourth-year Commerce student at Queen’s School of Business, noted that the U.S. Federal Reserve’s monetary policy and asset purchasing have not been able to drive up the economic fundamentals of unemployment, housing and inflation or corporate revenues. While equities have rallied, the result has been stretched valuations.
At 1.0%, inflation is still below Federal Reserve targets. Decreases in unemployment rates can be been partially attributed to a declining participation rate in the workforce. Further, home sales have shown considerable sensitivity to rising interest rates. “Although corporate earnings are growing, they are growing as a result of cost-cutting, not revenue growth,” said Goharian. “This is an unsustainable model.”
Overall, underlying economic performance remains modest, and rallying North American equity markets have largely outpaced the economic recovery.
What does this mean for Canada? Goharian explained that any monetary policy tightening will have amplified effects on Canadian consumers, who are significantly more leveraged than their U.S. counterparts and face a more fragile housing market.
For 2014, Goharian and his QUIC team suggest looking for investments with high free cash flow, a strong cash position and intelligent capital allocation. “Be on the lookout for stocks that are growing because of their top line and have low valuations to support a possible equity market correction,” said Goharian.
QUIC is a student-managed investment portfolio worth more than $650,000 that strives to outperform the market with managed risk.
Strategic and Operational Outlook
“All CEOs will have to start thinking like small business owners in 2014,” said Professor Douglas Reid, citing a recent Conference Board of Canada report. According to this framework, leading a successful organization in the coming years will require keeping a close eye on operations, a frugal adaptation focus, and emphasis on growth, Reid explained.
“2014 will be the year of actively doing differently with less,” said Professor Reid. “Not less with less, but changing the approach on how we activate knowledge within an organization.”
To do this, Reid recommended a three-pronged approach: Revisiting the basics, concentrating on operations over strategy, and improving focus. Managers should revisit the basics by sharpening their understanding of the problem their business is trying to solve and asking if their solution will be relevant in the future.
In the coming year, operations will be more important than strategy. “It’s about doing the work,” Reid explained. “And it doesn’t mean perfect implementation – now is the time to undertake cheap experiments to see what works.”
Finally, the buzzword for 2014 is “focus,” that is, paying attention and being more mindful. “It’s not about getting more time on the job, but rather paying more attention to what’s in front of you.”
New to the panel this year, Scott Carson, Professor of Strategy and Director of The Monieson Centre for Business Research in Healthcare, presented on the new collaborative governance model in Ontario healthcare and their implications for Kingston and area.
“It is clear that Ontario is rapidly moving toward a more patient-centered and integrated approach to healthcare. And the collaborative governance model is emerging as a guiding concept,” said Professor Carson.
Carson noted that a benefit of this grassroots, seamless care model is that it focuses on shared vision and consensus building. Conversely, an ongoing challenge of the new model is that boards will be comprised of directors from each of the collaborators, and it will not always be clear whether their fiduciary duty of loyalty lies with their home entity or the new collaboration. To address this challenge, “director education in the new model will be important.”
The Business Forecast Lunch was founded 32 years ago by Queen’s School of Business professor emeritus Merv Daub to establish an important link between the School and the Kingston business community.
About Queen’s School of Business
Queen’s School of Business is one of the world’s premier business schools—renowned for exceptional programs, outstanding faculty and research, and the quality of its graduates. Canadian executives regard Queen’s as Canada’s most innovative business school, offering students academic excellence and a superior overall experience. Queen’s School of Business—where Canada’s first Commerce program was launched in 1919—is located at Queen’s University in Kingston, Ontario. The School also delivers programs at locations across Canada, as well in the U.S., the Middle East and North Africa (MENA) region and China.
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