Canadian companies are surprisingly upbeat about the future in spite of the slowing economy and rising trade tensions, according to the Bank of Canada’s latest survey of business sentiment.
“Business sentiment continues to be positive, supported by healthy sales prospects,” the bank said on Monday in its second quarterly business outlook survey of 2018, conducted from Feb. 12 to March 9.
The survey’s main indicator − a composite of responses to such things as sales, hiring and investment intentions – fell slightly from the previous survey in January, but remains at a high level.
Labour pressures are “evident” in most regions of the country, the bank said.
The mainly bullish report strengthens the case for another rate hike in the coming months. But investors and many analysts are betting the central bank’s next move will be in July, rather than at its next scheduled rate announcement on April 18 or in May. The odds of a rate hike next week stand at 21.5 per cent but rise to 72.3 per cent for July, according to Bloomberg’s interest-rate probability tracker.
The bank has already raised its key interest rate three times since last June. It now stands at 1.25 per cent.
The Canadian dollar gained nearly a half cent to 78.68 US cents after the survey’s release.
“The bank has its work cut out for it,” Toronto-Dominion Bank economist Brian DePratto said. “It is clear they will raise rates again, but the question is when and how rapidly.”
Yes, businesses are confident, unemployment is lower than it’s been since the 1970s and inflation is now running slightly above the central bank’s 2-per-cent target. But that is tempered by an economy that has been slowing down in recent months, plus rising concerns about a global trade war and the uncertain future of the North American free-trade agreement.
Royal Bank of Canada economist Nathan Janzen questioned the upbeat tone of the survey, particularly its read on investment intentions. “Other surveys, as well as our own tracking of company plans, have not been so optimistic about overall business investment,” Mr. Janzen said.
The conflicting economic data make it more difficult to interpret the significance of the survey, which is based on responses from 100 companies that roughly mirror the makeup of the Canadian economy.
“This is only a survey, and it remains to be seen if the opinions expressed here are borne out in hard data, which have yet to provide any clear direction,” Canadian Imperial Bank of Canada economist Royce Mendes said in a research note.
Canada’s economy has slowed down after a burst of activity in the second half of last year. Many economists say GDP will grow just 1.5 per cent in the first quarter of this year, or a full percentage point slower that the Bank of Canada predicted in its fall forecast.
But inflation has picked up, reaching an annual rate of 2.2 per cent in February – the highest level in three years. And the jobless rate has continued to fall in recent months to reach 5.8 per cent in March.
Nearly half of companies surveyed – 48 per cent – reported stronger sales growth in the past year, while 43 per cent say sales growth will be stronger in the next 12 months.
Even plans to invest, which dipped a bit in the latest survey, remain strong. Forty-four per cent of businesses plan to boost spending on machinery and equipment in the year ahead, versus 21 per cent who expect to invest less and 35 per cent reporting no change.
Hiring intentions edged up a bit from the previous survey. More than half of companies – 54 per cent – plan to add workers over the next year. That compares with 9 per cent who expect to have fewer workers and 37 per cent who anticipate no change.
For the past year, the central bank has also been asking businesses about the impact of U.S. tax cuts, the renegotiation of the North American free-trade agreement and rising trade tensions. The survey shows that 71 per cent say they have not been affected yet and 59 per cent do not expect to be in the next year.
Among other findings:
- 26 per cent of companies report labour shortages, down slightly from the previous survey
- More than half of companies expect inflation to be above the central bank’s 2-per-cent target over the next two years