How Macroeconomic Conditions Affect Your Business

As the world is settling down to a new normal, some of the business strategies we used to employ pre-pandemic are coming back into relevance. One of the most important tools is business planning, and along with that, understanding the macroeconomic factors that affect how you navigate in your local market. In the earlier stages of the pandemic, it was quite difficult to have a business plan that was not immediately ineffective due to the volatility in the changes we were seeing and the uncertainty that the pandemic posed. Although business planning was also important during those times, it was harder to be disciplined to employ a tool that felt useless when so much was out of your control and changes were happening at a record-pace.

This month, we will look at the Bank of Canada’s Business Outlook Survey as research that will help inform your business plan development. More specifically, we will take a closer look at the Q4 2022 Survey that was published in early 2023 that touches on the following macro & micro economic factors:

1. How demand & supply play into the Business Confidence Metric
2. The role that interest rates play in affecting the economy
3. Supply chain & capacity planning for businesses
4. Inflation
5. Price & wage expectations

It is important to have adequate knowledge with the broad factors above as they will help shape decision making when it comes to your business. This will also assist in relieving some uncertainty as some of the factors are leading indicators that will help predict what comes next. Although nothing is ever certain – something the pandemic taught us well – we do need to bring a level of certainty to our businesses as we navigate into more sustainable economic times.

Click here for the Bank of Canada’s Business Outlook Survey, which will be used to further our analysis and its impact on business planning.

How demand & supply play into the Business Confidence Metric

Through the Business Outlook Survey (BOS), the Bank of Canada tries to better understand business conditions and how the overall economic conditions affect businesses. When looking at the Q4 2022 BOS, the overall business sentiment has declined to zero. This is unusually low as businesses can see that the interest rate increases are affecting consumer spending, which means that people are starting to reduce their spending overall – more so on discretionary items. This translates to less revenues for businesses and having to shift their focus on maintaining profit margins given the reduced sales levels. Another factor that is contributing to the low sentiment is higher interest rates, which means the appetite for lending and making investments is low.

If you are a business that has appreciated higher sales volumes and have grown accustomed to it, you may need to rethink these expectations. If you are planning similar sales levels to what you have had in the past year, then you may be in for a rude awakening and find yourself in financial trouble.

When it comes to healthcare businesses, although we are considered to be “recession proof”, that does not make us immune to the effects of changing economic conditions. For the healthcare businesses that rely on private insurance and where patients have to pay out of pocket, expectations may need to be adjusted as some people may delay treatment if it is not life-threatening or until they have the additional funds to do so. For our medical businesses, although we are funded primarily through OHIP, there may be some adjustments to reimbursement rates and models that will ensure that the government spending on healthcare is more fiscally responsible given these tighter economic times.

The role that interest rates play in affecting the economy

The Bank of Canada (BoC) plays a central role in shifting the economic “pendulum” to a more stable equilibrium. Although it is almost impossible to ever have a “perfect” economy, the BoC attempts to make changes to policy that will have a direct effect on key metrics such as consumer spending and saving. This is known as “monetary policy”. The BoC raises and lowers the interest rate in order to control inflation. In a time where inflation has been high, followed by greater consumer spending, higher input costs, and overall financial pressures on businesses, the BoC will increase the interest rate to slow down this growth.

Since March 2022, the BoC saw the key interest rate at 0.25% up to 4.5%. These aggressive rate increases in the last year were aimed to curb inflation and change habits that were not sustainable for the overall economy. Essentially, too much of anything is not always a good thing. Too much spending means people may not be saving, which can be disastrous in times of crisis. Additionally, wages increasing at high rates may be unsustainable because firms may not be able to directly pass on those costs to the end consumer. However, having these aggressive rate hikes cannot last forever, and that is why it is important for you to pay close attention to what is happening and ensure your business is prudent in responding to some of these outcomes.

Click here for an article that the BoC released in March 2023 goes further into detail about how interest rate increases are working and how there are promising signs that we may be in a more contained economic environment for the rest of 2023.

Supply chain & capacity planning for businesses

With the earlier days of the pandemic bringing on increased consumer spending, firms have been unable to keep up with demand, resulting in supply issues. This directly affected prices, with companies charging more for the same goods and people willing to pay due to unavailability. The good news is that supply chains have started to catch up, and with consumer spending taking a backseat, companies have been able to replenish their stock in order to meet or surpass demand. This results in lower prices for those same goods you may have purchased at a premium not too long ago. Supply challenges becoming less prevalent is translating to the labour market. Since employers feel that they can keep up with demand and supply chains can respond appropriately, there is less of a reliance on hiring to address the supply issues. This does not mean that there is no labour shortage, but rather the effects of the labour market are not intensified. At the end of the day, expectations are what drive decision making. If employers are expecting a more reliable supply chain, then they are not hard pressed on the labour front, meaning that their recruitment efforts can be more relaxed and focused on longer-term planning, rather than hiring to address the shorter-term supply issues.

When looking at the healthcare industry, we are not exempt from the effect of supply chain issues. You would have noticed that at the beginning of the pandemic, scarce PPE led to rationing critical stock to vulnerable populations and prioritizing procedures in order of essential down to elective. This is a perfect example of when resources that are not produced by our businesses can affect how healthcare practices offer services. This resulted in wait times and patients opting out of certain treatments. In times like this, it was important to be a more efficient operation and look at how you could deliver high-quality healthcare, while being creative with supplies, scheduling, and even case selection.

Inflation

We always hear about inflation and how important it is to remain within the 2% target rate. Inflation is measured as an increase in the general price level of key services and goods in an economy. The idea is to have a modest increase of 2% when measuring those same benchmark goods and services, which will allow for a more controlled and manageable economy. When inflation starts to go above 2% for sustained periods of time, the effects can be troublesome and felt in almost every aspect of our daily lives. If the cost of something you purchased today is over 2% higher than last year, you can manage it in the short-term. However, if the higher-than-normal rates persist, the average consumer starts to cut down on non-essential or discretionary purchases. To bring inflation down, it is important to understand what is driving this. In the Q4 2022 BOS, respondents stated the following reasons why inflation will remain high for the short term:

• High energy prices
• Constant supply chain issues
• High labour costs
• An overall strong economy

However, when those same respondents were asked about their expectations of where inflation will be 5 years from now, the majority stated it would be within the 1-3% range, which is in line with what the BoC is striving for.

The BoC’s increases to interest rates is what has affected the factors above and are perceived to eventually reduce inflation in the long run. When the cost of borrowing is higher, there is less reliance on energy due to a slowness in businesses investing, as well as the global economy releasing restrictions and opening trade, which was restricted earlier in the pandemic. Second, supply chain issues are starting to ease due to a decrease in demand since people cannot spend as much as they used to. Labour costs are going down since firms are not hiring as quickly and are becoming more efficient with the human capital they are employing. All of this leads to a weaker economy, which then reduces the inflation to more manageable levels.

Source – https://www.rateinflation.com/inflation-rate/canada-inflation-rate/

Inflation went to a record 8.1% in June 2022 but has gone down in recent months to 5.2% in February 2023. Although this is not the 2% target, the path forward is looking much better than it did mid-2022.

Price & wage expectations

The outlook in this area is looking better, and while still elevated, businesses are seeing a moderation in what they expect their price increases to be as well as the labour costs. The reasons that were attributed to the price increases were mainly the following:

• Higher commodity prices
• High demand
• Higher non-commodity prices
• Low competition

The factors listed above have started to improve due to a multitude of factors. The largest factor is the lower prices for commodities. Now that there is some level of stability in these prices and the global economies are showing signs of returning back to normal, companies are not as quick to increase their prices.

When it comes to wage growth, because of the perceived reduction in demand, businesses are not competing to fill as many positions within their organizations. As well, new positions that are geared towards growth may be fewer as companies are not looking into investments with the higher interest rates and are focusing on profitability – making the same profit with fewer sales. In addition to the economy slowing down, consumers are also not taking risks with changing jobs as they are unsure how things are going to play out. We are seeing mass lay-offs in certain sectors such as the technology industry (i.e., Microsoft, Twitter). The appetite for hiring has slowed down, and in parallel, so has the appetite for workers to look for new jobs. In comparing the overall labour market to that within the healthcare industry, we can see some of the same traits translating. If you are a practice that has not made changes early on in how you offer services, you may still be in a position of overstaffing and prone to a reduction in profit as consumers opt out of elective procedures. Practices that became creative during COVID and attempted to reorganize their workforce to more efficiently offer the same services will be reaping the benefits of having more skilled labour, or at least can be more selective in their hiring since they are not in a pinch to fill positions. What also helps are the incentives during the early pandemic days from the government to incentivize the population to get retrained and up-skilled to fill voids in healthcare-related positions. Although these programs did not solve the issues we saw in the early pandemic days, I am sure that we will start seeing some of those benefits as the economy cools down.

Source – https://www.bankofcanada.ca/2023/01/business-outlook-survey-fourth-quarter-of-2022/

In Conclusion

It is important to have a knowledgeable team of experts helping you make sense of the world you operate your business in. Our clients work in the healthcare industry and have spent years acquiring knowledge through academic channels, as well as building on that theory through their practical experience. Our team at MAP has done the same thing when it comes to the business side of operating your healthcare practice.

Business planning and careful understanding of the factors that affect your decision making are key to ensuring you can weather volatile economic conditions. Although the pandemic has shifted the way we perceive how businesses operate and what is truly normal, having yourself surrounded by a team of experts who have not only studied management, but also have practical experience in the healthcare sector may be the difference between just operating a practice and operating a successful practice.

This month we have gone through interest rates, inflation, wage growth, etc., all of which are factors we take into account when creating your business plan. Although we cannot plan for everything, the more we understand the specific needs and objectives of your business and your professional goals, the better we can minimize the impact of these factors or make them work for you. This is the recipe for a financially successful practice and a fulfilled and happier healthcare professional, which will ultimately help you deliver exceptional patient care.

Supplementary articles

• https://economics.cibccm.com/cds?id=aecf03c4-17d5-4ce7-9f3f-7ab30a4ac82a&flag=E
• https://thoughtleadership.rbc.com/canadian-economy-unlikely-to-dodge-a-downturn-despite-early-2023-resilience/
• https://financialpost.com/news/economy/3-things-bank-of-canada-subtly-said-interest-rates-march-minutes/wcm/64b3865a-8437-4c42-8bae-468f87a9aaef/amp/
• https://www.bloomberg.com/news/articles/2023-03-06/canada-s-higher-interest-rates-cause-borrowers-pain-in-inflation-fight?leadSource=uverify%20wall#xj4y7vzkg