The Bank of Canada’s quarterly Business Outlook Survey indicated that business sentiment about the year ahead is “subdued.”Chris Wattie/Reuters
Canada's economy enters the second half of 2016 amid hopes of better times around the corner. But the tepid mood in the business community and some unsettling events of the past two months suggest that the country still has plenty of economic uncertainty cluttering its path.
Economists believe the country is poised to rebound from the economic lull of the past several months, during which, they estimate, the country's real gross domestic product fell at an annualized rate of roughly 1 per cent in the second quarter that ended June 30. But even as the bounce-back third quarter begins, a new reading released Monday on a key barometer of business confidence – taken after the wildfires hit Alberta's huge oil industry, but before the global-shocker referendum vote in Britain to exit the European Union – suggests the country's private sector remains cautious, and not yet ready to loosen its tight grip on spending.
The Bank of Canada's quarterly Business Outlook Survey, a key gauge for the central bank on such things as the pace of business growth and the potential for hiring and investment, indicated that business sentiment about the year ahead is "subdued," and still highly uneven between businesses tied to the energy sector and those that are not.
The bank interpreted the survey results as a sign that soft business activity lies ahead as "the boost from foreign demand remains insufficient to outweigh the continued drag from commodity-related activity combined with modest domestic demand," it said.
The survey showed that spending intentions on machinery and equipment – considered pivotal for economic growth – showed no pickup from their previous sluggish levels. Hiring intentions are "below post-recession levels" and expectations for sales growth over the next 12 months have fallen to near zero, the central bank reported.
"The moderation in future sales expectations was concentrated among firms in the Prairies, which see few signs of a recovery from the oil price shock," the report said. "In other regions, steady, albeit modest, domestic momentum is providing support to firms' sales outlooks. In a number of cases, however, expectations of acceleration merely reflect the view that domestic sales growth will not deteriorate further or will modestly increase over the next 12 months."
The survey was conducted between May 9 and June 8, a period that captures the unfolding tumult of the Alberta wildfires – a disaster so large that it put a considerable dent in Canada's economic growth outlook, if only temporarily. While the huge slice of oil production lost to the fires throughout May and early June is believed to have knocked overall economic growth into negative territory in the second quarter, economists expect the return of that production to cause the economy to roar back in the third quarter, with forecasts calling for real GDP growth north of 3 per cent annualized. Reconstruction in fire-ravaged Fort McMurray should also provide a boost to economic activity for many months to come.
Meanwhile, economists – and, indeed, many business leaders – are hopeful that the U.S. economy, so critical for Canadian exporters, is back on track for solid growth after a surprisingly sluggish start to the year, in which U.S. manufacturing exports and business investment stumbled amid a strong U.S. dollar and uncertain overseas markets. U.S. GDP grew just 1.1 per cent annualized in the first quarter, but economists believe the growth rate rebounded to about 2.5 per cent in the second quarter, a pace that they expect will continue in the second half.
"Up until now, Canada has been stronger than we planned on, while the United States has been weaker," said Bill Hammond, chief executive officer of Guelph, Ont.-based transformer manufacturer Hammond Power Solutions Inc. He said he's optimistic about the second half, noting a pickup in order bookings among U.S. and Canadian customers.
But just as the U.S. sluggishness and the Alberta wildfires look set to fade from view, a new uncertainty has emerged: Britain's June 23 referendum that resulted in a vote to leave the European Union. While Canada's direct trade exposure to Britain is relatively small (about 3 per cent of total goods exports), the vote result has raised a new wave of global economic and financial market uncertainty, which may wash up on Canada's shores.
"It's a bit of a wild card," said Nathan Janzen, senior economist at Toronto-Dominion Bank. "It's just one more reason [for businesses] to be cautious."
Economists say the profound uncertainty created by the prospect of Britain's exit from the European economic partnership could weigh considerably on already tentative business investment – chiefly in Britain and the other EU countries, but which could spill over to businesses worldwide, given the deep interconnections in global production and supply chains. It could serve as a general drag on global demand – a concern for an export-driven economy such as Canada's.
"The last thing the global economy needed was more uncertainty, and the Brexit vote to leave certainly created that," Mr. Hammond said.
On the other hand, economists are optimistic that Canada's beleaguered energy sector, while probably not poised for a rebound in the second half of the year, may have at least found a stable bottom. But while the current North American benchmark price of oil, which has stabilized near $50 (U.S.) a barrel, is much healthier than the sub-$30 prices of early in the year, it is still too low to reverse the plunge in investment in the Canadian oil patch, which is down about 60 per cent from two years ago.
"There is a bit of cautious optimism [because] at $50 we are seeing some shut-in production returning, but other than that we are not seeing a lot of new capital deployed," said John Barkhouse, CEO of Calgary-based oil-industry waste processor Newalta Corp. He said it will take at least $60 oil for that spending to resume.
"For the first time in 18 months, we are actually seeing some signs of stability and potential recovery."