‘Odds advance’ on another interest rate cut
Spending down at Canadian companies
• The dial may have been turned up a notch for another interest rate cut.
Canadian firms are still struggling to maintain growth overall and — despite signs of a long-predicted pickup in the U.S. economy — business operators appear hesitant about plowing more money into capital investments and taking on additional staff.
Two critical economic surveys, released Monday, point to disappointing spending levels by Canadian companies that could sway the country’s central bank to provide more so-called insurance against a recession — driven mainly by the oil-price plunge — by shaving its lending level for the second time in six months.
That decision could come in just over a week and push down the Bank of Canada’s key rate to a level not seen since mid-2010.
“While the worst of the economic hit from the price collapse is likely behind us, there was little in (Monday’s) report to inspire optimism about Canada’s economy,” said economist Leslie Preston, at TD Economics.
“When combined with a likely contraction in Canada’s economy in Q2, which (would) put it in recessionary territory, it increases the odds that the Bank of Canada will cut rates next Wednesday to support Canada’s flagging economy.”
The Bank of Canada, in its summer poll of companies, said “while there are some encouraging signs, owing in part to strengthening U.S. demand, weak oil prices continue to significantly dampen economic perspectives in affected sector and regions.”
Investment and hiring plans “remain weak,” the central bank found in its survey. Energy-based companies, in particular, plan to reduce investment and hiring over the next 12 months.
“On the upside, intentions to increase investment are more prevalent among manufacturing firms and businesses in Central Canada.”
The quarterly survey results, based on responses from senior managers at about 100 firms across the country, found the weaker Canadian dollar is dampening investment by companies due to the higher costs for imported machinery and equipment.
“Firms continue to report stronger sales growth over the past 12 months,” the bank said, but outlook for future sales in the coming year “remains positive but weak.”
The results of the Busi- ness Outlook Survey will help policymakers determine their next interest rate decision, which will be announced July 15 along with their quarterly Monetary Policy Report on domestic and global economic data.
The rate is currently at 0.75 per cent, after being cut from one per cent in a surprise move in January by bank governor Stephen Poloz as the plunge in oil prices began to impact economic growth. Prior to that, the key rate had been unchanged since September 2010.
It moved from 0.25 per cent to 0.5 per cent in June 2010.
The survey was conducted between May 15 and June 10, before data showed Canada’s economy contracted 0.1 per cent in April. In the first quarter of 2015, gross domestic product shrank 0.6 per cent. Together, those two readings raise the prospect of the country slipping into recession — technically viewed as two consecutive quarters of negative growth.
“I would think that based on everything that has happened in the last little while, I give it slightly better odds that they’ll cut rates — even though I think the business outlook survey probably pulled it back a notch,” said Douglas Porter, chief economist at BMO Capital Markets.
“There’s actually more than a one-quarter-point cut priced in by the end of the year. So, there’s a slim chance of a second cut being priced in — and we haven’t seen that since the late-January, earlier February days when the markets were convinced there was going to be a followup cut after the January reduction,” he said.
“I think the odds have advanced a bit.”
Meanwhile, in a separate survey Monday, Statistics Canada said capital spending by companies on nonresidential construction and machinery and equipment this year is expected to total $251.8 billion, down 4.9 per cent from 2014.
The survey of 25,000 businesses and organizations showed public-sector capital spending would decline 0.2 per cent, the federal agency said.
Private-sector expenditures are estimated to drop seven per cent.
Capital spending in the mining, quarrying, and oil and gas extraction sector are likely to fall 18.7 per cent in 2015 to $67.9 billion.
“To no surprise,” the federal agency said, energy provinces are seeing the bulk of the decline — Alberta and Saskatchewan both seeing low double-digit retreats, and Newfoundland and Labrador was “essentially flat,” said Avery Shenfeld, chief economist at CIBC World Markets.
Ontario, however, is also showing weakness, dropping 1.5 per cent. Quebec, on the other hand, spending rose 2.7 per cent.
The manufacturing sector indicated plans for capital spending would likely increase 2.7 per cent in 2015.
Even s o, nominal outlays represented “tepid real growth for the sector that is supposed to be helped by the weaker loonie,” said Shenfeld.
We haven’t seen that since the late-January, early February