Economic Outlook: 2023 Surviving and Thriving During Recession and Recovery

2023 is shaping as a consequence of multiple shocks from 2022: the war in Ukraine, U.S-China economic relations, inflation and increases in lending rates. Most experts agree a recession is likely – with most signs pointing to a mild one. In Canada, we expect it to hit during the last two quarters of the year.

While recession isn’t something anyone looks forward to, the upside is that it indicates that the economy is ready to turn. Given normal economic cycles, and the fact that we had been riding a growth period of almost 10 years, some downturn was almost inevitable. Now, supply chain issues are resolving. Throughout North America, unemployment remains low. And despite recent layoffs in the tech industry, the continued shortage of workers in all sectors will dampen the recession.

Equipment financing industry

The most noticeable factor in the equipment finance industry in recessionary times is significant tightening of credit at banks, and the coming recession will be no different. While independent lenders – including Mitsubishi HC Capital Canada – can offer more flexibility and a wider variety of programs suited for each individual case, the key challenge for our industry will be how to manage rising delinquencies.

Yet what we see happening is the rate of delinquencies returning to more “normal” levels than we typically experienced in pre-COVID times. Thanks in large part to money the government pumped into the economy during the height of the pandemic, many companies saw cash flow and savings increase significantly. Delinquencies were at historically low levels. The pendulum perhaps swung too far, though at the time, the stimulus programs were necessary. The return to pre-COVID delinquency levels may alarm some, but is really just a leveling-out action.

We believe that the manufacturing industry, across sectors, will experience the highest rates of investment and financing. To deal with the worker shortage, manufacturers are increasingly turning to automation, and will need to finance major long-term investment.

Looking south

It’s said that when the United States sneezes, Canada catches a cold. Putting aside current jokes about catching COVID, it’s still the case that both economies are tracking in the same direction. On the plus side for Canadians, inflation is a bit more controlled, and we aren’t dealing with a debt ceiling issue. We also are well-positioned in natural resources.

However, consumer indebtedness presents a particularly significant risk to the Canadian economy. In almost all markets, real estate prices are finally coming down from all-time highs that have left many Canadians with serious mortgage debt, which has in turn stressed their other finances. Non-mortgage consumer debt has climbed to its highest level since early in the pandemic,

What now? Take the long view

The best thing businesses can do this year is to take a breath, take a step back and take a long-term view. It can be easy to get wrapped up in inflation rates and what Canada’s central bank is going to do, and put business plans in a hold phase.

While it’s true we haven’t seen inflation at this level in 40 years, it’s important to remember we have had some degree of it each year. At this point, indications are that we’ll likely see no more rate increases, and that the central bank has quelled inflation. It may take 12-24 months to get back to the low inflation levels we were used to before the pandemic, but signs are that we are headed in a positive direction.

That said, now is the time to plan. It’s too late to plan for the present – which you can’t change – but you have full power to plan for the future. Take time now to consider different economic scenarios and determine how your business will react to each. By developing alternatives and contingency plans, you can be ready when – not if – the uptick comes.

From an investment perspective, we are in a unique period where long-term rates are lower than short-term rates. Companies need to manage investments carefully, and perhaps differently than they have before. From a financing perspective, we know it’s usually better to finance longer-term projects, but this is the time to do your math and make careful decisions.

The time to plan

The bottom line is that history has confirmed, time and time again, that companies that do best in the long term are the ones that invest carefully in economically challenging times. The current situation is temporary. If you’re in business for the long haul, these next several months are the crucial times to prepare for when you come out of the recession.