Business conditions suggest North America, particularly Canada, is in a stronger position to pull out of the current economic downturn than it was during the recession of the early 1990s, according to a report released today from RBC Financial Group. The report is entitled “Seeing Through the Gloom in North American Business Conditions and Finances.”

The study says monetary and fiscal policy conditions, along with corporate financing conditions, are much stronger pillars of growth today than ten years ago. “The cushioning effects of surpluses, tax cuts, lower energy prices and interest rates at 40-year lows, translates into a better picture for Canadian businesses than in the early 1990s downturn,” said Derek Holt, assistant chief economist.

The report from RBC Financial Group also underlines other strengths in today’s business environment in contrast to the early 1990s:

– Labour costs are under control
– Adjustment costs of the FTA and NAFTA have largely been absorbed
– Monetary and Fiscal policy are in better shape and therefore able to adjust in economic downturns
– An undervalued Canadian dollar is helping Canadian exporters offset a weakened US economy.
– Strength in corporate bond markets is providing a financing outlet for
many companies

Holt’s study argues that although corporate financing conditions are weaker than in recent years, they are fundamentally better off today than in past periods of economic recession. Unlike the early 1990s, recent performance of the bond market has helped alleviate the negative impact of the stock market, and while a decade ago there were problems with corporate loans and soaring write-offs on commercial real estate loans, the latter is virtually non-existent today.

The study says that businesses should benefit from better inventory controls implemented during the last ten years (50% inventory-sales rate in the early 1990s compared to 41% today). And when this is combined with healthier average debt-to-equity ratios (from about 75% in 1990 to 55% in 2001), the overall picture is good news for small and medium-sized enterprises.

Overall, though, the RBC Royal Bank study says today’s economic hurdles aren’t as formidable as those faced during the early 1990s. And while the current stock market correction is moving into its second year, longer than experienced during the early 1990s downturn, Canadians have not been exposed to the real estate bubble that burst across the economic landscape ten years ago. This is important to note, the study says, because history shows that major real estate corrections deliver a sharper negative impact on growth than stock market corrections. “Overall there is a window of opportunity for businesses to pursue amidst the general climate of uncertainty,” Holt said.