Boardrooms are bracing for a recession; let’s hope Ottawa is too
If Vancouver’s Indochino Apparel Inc. is starting to think about a recession, then the rest of us probably should too.
Things are rolling at the digital retailer of bespoke suits, shirts and coats for men. Indochino just opened its 50th showroom in four years. The newest one is in Washington’s Georgetown neighbourhood, among the most popular places to spend money in one of the U.S.’s richest metropolitan areas.
Drew Green, the chief executive, says his closely held company’s compound annual rate of return was almost 50 per cent between 2015 and 2019, and that he’s booked profits for three years in a row. That’s a good look heading into 2020, as investors appear to be losing their taste for digital companies whose strategy for gaining market share is burning cash. The Wall Street Journal reported on Tuesday that Bonobos, a competitor of Indochino’s that Walmart Inc. purchased in 2017 for US$310 million, is cutting a few dozen jobs to help narrow losses.
Postmedia Network Canada Corp., which owns the National Post, has a small equity stake in Indochino.
“We could be growing at 60 per cent or 70 per cent, but for what?” Green said in a telephone interview last week. “I’m trying to build a multi-generational brand that sustains through generations and you’ve got to be cognizant of how you are investing and in the bottom line.”
Restraint could come to be seen as an even wiser strategy if the gloomier predictions about where we’re headed come true.
In June, the World Bank predicted the global economy would expand 2.6 per cent in 2019, the slowest in three years and poor by historical standards. “We now expect growth to be even weaker than that, hurt by Brexit, Europe’s recession, and trade uncertainty,” David Malpass, the World Bank’s president, said in a speech at Montreal’s McGill University on Monday.
Forecasts of that sort are enough to make the leaders of a retailer with clients in 50 countries take notice. Indochino set up in Australia earlier this year at about the same time the central bank started cutting interest rates to get in front of weaker exports and a rising jobless rate. “The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending,” Philip Lowe, governor of the Reserve Bank of Australia, said on Oct. 1 while explaining his latest quarter-point cut, which dropped the benchmark rate to 0.75 per cent.
“It’s going to be an interesting 18 months,” Green said when I asked him about the economic outlook. “As a board, we talk about it. We talk about, what if there is a recession in 2020 or 2021, and what steps do we need to take to make sure the business in properly protected. It wasn’t a board topic two years ago, but it is a board topic at this point.”
One hopes that preparations for a recession will be a cabinet topic as well as soon as a new government is chosen. The election campaign has offered little evidence that the parties have thought much about the possibility, so there will be work to do. “Leaders should be judged not only by how they managed the economy in good times, but also how they plan to respond when the economy is weak,” economists at Bank of Nova Scotia argue in a report published Tuesday.
The authors, Rebekah Young and Nikita Perevalov, imagine a shock that is beyond Canada’s control, such as an escalation of U.S President Donald Trump’s trade war with China. Extreme uncertainty would kill demand for exports, which would crush business investment. Canada’s impressive run of hiring would stop and probably reverse. Wage growth would stall and consumer confidence would plunge. When it’s all over, gross domestic product has declined 2.5 per cent over six quarters.
A reader of the news will realize that such a scenario is entirely plausible in the near term. Scotia’s economics team, led by Jean-François Perrault, a former Finance and Bank of Canada official, predicts that Canada’s central bank will cut interest rates later this month and again by early next year as insurance against the trade wars.
Monetary policy would be the first response to a recession because it can be deployed with speed. But fiscal stimulus also would be needed. Household debt already is uncomfortably high and would limit the Bank of Canada’s ability to restart the economy on its own. Canada’s recovery from the Great Recession was weaker than it might have been because Prime Minister Stephen Harper’s government was too quick to balance the budget. “The federal government has a better balance sheet to manage a downturn than households,” Young and Perevalov wrote.
The Liberals and Conservatives have demonstrated a willingness to leverage the government’s balance sheet, but few of the gimmicky tax cuts and credits they’ve offered voters would do much to offset a recession. Normally, roads and bridges would be an effective way to boost growth, but any new spending would be caught in the bottleneck caused by the Trudeau’s government’s infrastructure program.
Young and Perevalov suggest measures that would quickly funnel cash to households that would be most likely to spend it, such as a temporary increase to the Canada Child Benefit. A short-term cut to payroll taxes might help avoid mass layoffs. “An appropriate fiscal response should be timely, targeted, and temporary,” they said.
It should be stressed that this is contingency planning. Most forecasters, including Scotia, reckon the global economy will push through the headwinds. “I still see on a micro-level, in our business, the consumer being extremely strong,” Green said. But smart companies prepare. Governments, if they’re smart, will start preparing for a downturn too.