Canadian businesses urged to diversify amid possible recession

Canadian businesses urged to diversify amid possible recession | Insurance Business Canada

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Canadian businesses urged to diversify amid possible recession

Economic slowdown and geopolitical risks pose challenges, QBE cautions

Insurance News

By
Gia Snape

An economic slowdown and high interest rates, coupled with disruptions linked to catastrophes and geopolitical risks, pose huge challenges for Canadian businesses that trade internationally, a new report by QBE Canada has revealed.

The increased volatility calls for organizations to focus on resilience and diversification, especially with a recession expected to take hold in H2 2023 and last into 2024, according to Ben Hunter (pictured), director of QBE Canada.

“Canadian businesses face a variety of challenges in this increasingly complex geopolitical and financial environment,” Hunter said.

“When you look at the data and overlay it with the rise in cyber, natural catastrophes, and pandemic risks, it means that companies need to spend time building resilience and diversification.”

Canada’s recession could stretch into early 2024 – what are the risks to international trade?

The Canadian economy is expected to enter a technical recession that will last into early 2024, according to the QBE report, which analyzed data collated by Control Risks and Oxford Economics. Disruptions linked to wildfires and past interest rate hikes are expected to make a full impact next year.

Exports of Canadian goods (in real terms) will stall next year, while imports of goods are forecast to decline by 1.1%. Canada exported and imported $618 billion and $578 billion in goods in 2022, respectively, creating a trade surplus of $40 billion.

At the same time, US growth is also waning, which could contribute to less trade. More than three-quarters (76%) of Canada’s export earnings came from US customers, and 62% of its imports came from its neighbour.

The report also named Canada’s largest exporting and importing sectors. Metals are the largest Canadian exporter, posting $50.4 billion or 26% of all export earnings from the sale of goods. Manufacturers of food products, beverages, and tobacco were the largest importers, at $72 billion or 22% of the total.

Largest Canadian exports

Largest Canadian importers

Basic metals

Manufacturers of food products, beverages, and tobacco

Vehicle manufacturers

Basic metals

Chemical manufacturers

Vehicle manufacturers

Manufacturers of paper products

Manufacturers of petroleum and petcoke refiing products

Wood manufacturers

How can businesses mitigate international trade risks?

With these factors in mind, Hunter urged organizations to reconsider their growth and resilience strategies. He stressed the need to diversify sales and sourcing to other countries and to carefully assess current and prospective trade partners for risks.

“There needs to be an awareness of companies that you’re dealing with, where they’re located and where their trade routes are, to ensure there isn’t an overly reliant need on one country or company,” Hunter said.

“Thinking about where you locate warehouses, offices, manufacturing facilities – are they within areas that could be exposed to wildfire or floods? Trade routes, where you’re shipping goods to and from, can also be impacted by the perils that weren’t top of mind a few years ago but are now an important consideration for businesses.”

For the manufacturing industry, managing supply chain risk will be critical amid Canada’s recession. Having multiple suppliers to source component parts and materials should be a priority for top importers, while exporters should be too reliant on one customer.

“How do you look at diversifying and selling to other countries and companies with less heightened geopolitical or natural catastrophe risk?” Hunter asked.

The high dependency on the US as a trade partner highlights the importance of the Canadian dollar’s exchange rate with the US dollar. To protect themselves from negative shocks due to sudden changes in the exchange rate, QBE Canada also recommended that businesses hedge foreign exchange risks by buying futures, currency forwards, or options on the currency market.

Finally, from an operational standpoint, fine-tuning and testing business continuity and disaster recovery plans will help ensure organizations aren’t significantly impacted by a singular event.

“The cost of capital has increased with increased interest rates,” Hunter also noted. “So, looking at the risk profile of companies, and managing and making changes to portfolios based on that risk tolerance is also an important aspect.”

What are your thoughts on QBE Canada’s international trade risk report? Tell us in the comments below.