Economic growth must come from the private sector in 2013; Kingston faces significant economic challenges

Panellists Gary Bissonette, Robbie Mitchnick, Lynnette Purda, and Barry Cross

December 11, 2012 – KINGSTON, ON – Expect low economic growth and approach financial markets with caution, advised Queen’s School of Business faculty at the 31st annual Business Forecast Lunch held today in Kingston, Ontario.

Despite these cautions, the panel was optimistic that inflation, interest rates and unemployment levels will not rise. Operationally, they suggested that a slower economy is the ideal time to push organizations to the next level of growth. In Kingston, despite growing municipal economic challenges, there are signs of investment in the local economy. The panel made recommendations for the City to consider as a way forward.

Looking back at 2012, the panel’s forecast was remarkably accurate. Panelists’ predictions that the Canadian dollar would remain at par with the U.S., interest rates would be flat and the unemployment rate would hover near seven per cent hit the mark this year. The only exception was the panel’s overly optimistic estimate of GDP growth, which can be attributed to the weakness in Canada’s economic growth rate in the third quarter of 2011.

A summary of each panelist’s 2013 forecast is included below.

Macroeconomic Outlook

“Since the 2007 financial crisis, Canada has proudly reported the resilience of its economy and its financial sector,” explained Lynnette Purda, Associate Professor of Finance. “But five years of being ‘better than average’ still takes a toll when the average is low.”

Professor Purda reported that despite our national strengths, ongoing sluggishness in the world economy has reduced Canada’s exports and limited the country’s ability to grow at home. Combining this limited growth in the private sector with cuts to public spending has resulted in weak economic growth with no sign of immediate improvement.

Weak economic performance year after year has impacted the consumer as well. “Consumer confidence levels are still well below 2007 levels and an increasing proportion of Canadians are reporting significant money worries,” said Professor Purda.

There are a few bright spots in the economic outlook, however, with inflation, interest rates and unemployment all being forecast to remain near their current low levels.

“In 2013, economic growth must come from the private sector,” said Professor Purda. “The higher demand for auto sales south of the border has resulted in investment in Ontario’s automotive industry and there are some promising signs that additional investment is being made in Kingston and Ontario.”

The BFL panel predicts that GDP growth in 2013 will hover just below two per cent, and this modest growth will lead to fewer pressures on inflation and interest rates.

Financial Markets and Investment Outlook

“2012 was another challenging year for investors,” said Robbie Mitchnick, CEO of the Queen’s University Investment Counsel (QUIC) and a fourth year Commerce student at Queen’s School of Business. QUIC manages a $600,000 investment portfolio that has outperformed the TSX by 14 per cent since its inception in 2010.

In a recap of the market performance for 2012, Mitchnick reported that global headwinds  from Europe to the U.S. and China  all conspired to stunt economic growth and dampen investor appetite for risk. In Canada, weakening demand for metals and worsening fundamentals in the oil market collectively weighed down returns on the Toronto Stock Exchange (TSX). Mitchnick also reported that the U.S. markets outperformed Canada, having rallied from a considerable low at year-end 2011, while in Europe, select assets delivered excellent returns.

Turning to the investment outlook for 2013, QUIC foresees that troubled public sector balance sheets, stretched monetary policy and private sector de-leveraging will present structural headwinds.

“The threat of plunging over the ‘fiscal cliff’ is small, but very real,” Robbie Mitchnick explained. “If that happens, the consequences would be calamitous for the markets.”

In terms of the Eurozone crisis, the spotlight will turn to Spain and France. “Bullish investor sentiment has steadily trended upwards,” Mitchnick explained. “Even at seemingly low valuation levels, the market may be getting ahead of itself.”

Strategic Outlook: Great Companies Succeed in Tough Economies

“For many firms, a challenging economy is the time to take on a conservative strategy, and effectively ‘lay low’ while the business environment improves,” said Operations Management Professor Barry Cross.

In his presentation, Cross advocated the opposite approach for 2013. “A tough economy is the best time to lay the foundation for growth and push the organization into what’s next.”

Professor Cross advocated that leaders focus on three incremental changes in 2013 to help differentiate their organizations. First, organizations should ask themselves: “Who is the customer?” This starts with fine-tuning an understanding of who its valuable customers are, what they want and why they do business with the organization. “Narrow down that focus in the interest of enabling operations to serve those customers more effectively,” said Cross. “We fail when we try to be all things to all people.”

Next, it’s time to tune up the engine. Slower times present opportunities to rationalize product and service lines and eliminate those that do not contribute. “Focus on fewer products and services that people really want,” said Cross. In terms of aligning the organizational team to the strategy, Cross suggests that the leadership ensure the team understands the needs of the customer, deals with underperformers and eliminates distractions and excuses to better enable people to do their jobs.

And finally, Professor Cross asked businesses to do one remarkable thing in 2013, such as ramping up corporate philanthropy, tackling a tough operational challenge, or uniting the team to accomplish something in the community. “We don’t always appreciate that company culture starts with leadership and our behaviour,” said Professor Cross. “Etching one stretch objective in stone, and then making it happen is a significant step towards creating a winning attitude around the workplace.”

Local Outlook

Kingston’s non-commercial services base has enabled the community to absorb the shocks of the financial crisis. But Gary Bissonette, Assistant Professor of Business wonders whether an over-reliance on this sector will continue to provide a relatively stable market environment or expose the city to a greater risk of stagnation.

“Near-term forecasts for Kingston’s economy indicate that the city is in for a period of relative anemic growth,” said Bissonette. Job growth is projected to be relatively flat for the next three years, with a growing concern that new jobs will be created in the part-time and casual workforce sector. Population growth for the Greater Kingston Area is expected to be flat as well, with much of this growth in retirement and near-retirement age groups.

Looking forward, Bissonette identified seven key economic challenges that Kingston will need to wrestle with:

• The “agility deficit” in which the City’s over-dependence on non-commercial services becomes a potential liability.
• A capital crunch as Kingston looks for the funds to pay for new municipal infrastructure and maintenance requirements.
• A continued appetite for higher levels of municipal spending with current budget “savings” achieved largely by spending deferrals or one-time reductions rather than fundamental changes to operations.
• Rising consumer debt levels may curtail anticipated retail sales growth.
• The “branch market mentality” stemming from global consolidation by multi-nationals and foreign direct investment into Canada, which impact Canada’s control over its economy.
• A possible reduction in the local tourism trade, reflecting a reduction in overall tourism activity for Canada, as a whole.
• The aging population, migration of young professionals and low immigration will result in continued workforce challenges for Kingston.

Bissonette suggested several solutions for an initial response strategy from the City, including setting and supporting both financially and structurally  defined “clusters of attractiveness” that differentiates Kingston from competitive regions. He concluded that Kingston needs to put economic agility back on its radar.

“The Kingston Economic Development Corporation is our community’s research and development arm, yet we spend only one per cent of our municipal budget supporting new initiatives for economic growth,” said Bissonette. “Additional research and development resources are essential.”

The Business Forecast Lunch was founded by Queen’s School of Business professor emeritus Merv Daub to establish an important link between the School and the Kingston business community.

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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. and the Middle East and North Africa (MENA) Region.

For more information, please contact Queen’s School of Business:
Amber Wallace: 613.533.3151 / awallace@business.queensu.ca
Andrea Strike: 613.533.3129 / astrike@business.queensu.ca

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