OTTAWA - Canadian businesses need to redouble their efforts to innovate and diversify their sales if they are to remain globally competitive amid the economic turmoil in the United States, the Conference Board of Canada says.
Conference Board chief executive Glen Hodgson said the change won't be easy, but if businesses want to survive they will have to make changes.
"Diversification away from reliance on the U.S. is not going to be simple for businesses," Hodgson said.
"They may have to think about doing business in a very different way."
Hodgson said the economic outlook for Canada is generally positive, but the U.S. may be in the midst of a lost decade.
"What's happening right now in the U.S. is just the opening act. This is not the end of the story. It is essentially the beginning of the story and there are going to be a lot more difficult negotiations before the U.S. gets to a stable fiscal position," Hodgson said.
The Conference Board report came as Statistics Canada reported manufacturing sales slipped 0.8 per cent, or $360 million, to $46 billion in May. Lower sales were reported in 11 of 21 industries, representing 71.9 per cent of total manufacturing.
The drop was lower than most economists had expected due to lower auto production, petroleum and coal sales and sharply lower food sales, particularly among dairy food producers.
"Considering the fragile nature of the US economic recovery, not to mention the strong Canadian dollar, we still foresee a continuation of the gradual recovery in manufacturing," economist David Madani of Capital Economics said.
Hodgson said that with defence, medicare, medicaid, social security and interest payments making up more than three-quarters of U.S. government spending, there will be no pain-free way for the U.S. to deal with its deficit estimated at more than $1.3 trillion a year.
The talks to increase the U.S. government debt ceiling are only the beginning of what will be a difficult road back to a balanced budget, he noted.
However, the Canadian economy appears on track and short-term interest rates are expected to rise, which will put upward pressure on the loonie and hurt companies that depend on U.S. markets.
Roughly 70 per cent of Canadian exports go to the United States.
The automotive and forestry sectors in Ontario and B.C. are also expected to remain sluggish as mediocre U.S. growth will weigh them down.
While the Bank of Canada is widely expected to keep its key overnight target rate at one per cent when it makes its rate announcement next week, economists expect the central bank to start raising rates later this year.
