Canadian companies positive about future
Many to keep expansion in check despite outlook, Bank of Canada says
Canadian businesses are warming to the prospect of increased sales — export-driven perhaps more than domestic — but they are keeping major expansion plans on the back burner for now.
In the meantime, companies remain cautious in their investment and hiring plans, even though inflation is expected to remain tame and the “lagged effects” of a weaker Canadian dollar and a stronger U.S. economy should support sales activity, according to a snapshot of business sentiment.
The Bank of Canada, in its quarterly Business Outlook Survey released Monday, said there are “some encouraging signs for the economic outlook, although lingering uncertainty amid intense competition still hinders the pace of growth.”
The survey of 100 major Canadian firms suggests that while many saw a “more modest improvement” in sales over the past 12 months, “expectations for future sales growth remain positive, and there are indications that business sentiment regarding exports is gradually firming,” the central bank said.
Canadian companies selling to the domestic market “remain hopeful that sales growth will improve, owing in part to their efforts to increase market share. Overall, however, competitive conditions remain challenging, and many firms have yet to see signs of a notable and sustained strengthening in demand,” the bank said.
“Among firms with international sales, recent indicators of future sales momentum continue to improve compared with a year ago,” thanks in good part to a strengthening U.S. economy and “the lagged effects of the depreciation of the Canadian dollar,” according to findings of the survey conducted between May 20 and June 12.
Stephen Poloz, the Bank of Can- ada governor, has been using the power of persuasion to nudge business leaders into spending more on expanding their markets.
Poloz, the former president of Export Development Canada, the federal credit agency, insists — as did his predecessor at the bank, Mark Carney — that growing the post-recession economy requires a significant rotation from heavily indebted households to businessfocused spending.
Monday’s survey results suggest he has had limited success.
“Investment in machinery and equipment remains firmly positive, although investment plans are tied primarily to upgrading or replacing existing equipment over the next 12 months,” the bank said.
“Signs of more robust growth in foreign demand over the near-to-medium term are leading some exporters to favour investments with a longer-term strategic focus.”
Poloz, who took over as governor a year ago in June, has so far maintained the Bank of Canada’s trendsetting interest rate at one per cent — the level set by Carney in September 2010. Late last year, however, he adopted a neutral stance on the next direction of borrowing costs, dependent on future economic “data flows.”
Until recently, the rate of inflation — the bank’s main policy focus — has been below Poloz’s target of two per cent, the midway point between an ideal range of 1 per cent to three per cent. In May, the Consumer Price Index — as tracked by Statistics Canada — reached 2.3 per cent, following a two per cent reading in April and 1.5 per cent in March.
“Governor Poloz puts a heavy weight on surveys and [Monday’s] will provide the bank with all the reason it needs to do absolutely nothing,” said Benjamin Reitzes, senior economist at BMO Capital Markets.
“The survey shows little reason to increase concern about inflation, and activity looks to remain subdued. Overall, there is nothing here to push the Bank of Canada away from its neutral stance,” he said.
The bank’s next rate decision is on July 16, the same day as its Monetary Policy Report, a quarterly outlook on domestic and global economic trends.
“One potentially troubling reading was the big drop in employment intentions,” said Reitzes. “However, the prior two surveys had strong employment readings and that didn’t translate into a pickup in job growth, so there may not be much downside.”
The next report on Canada’s job market will be released on Friday, with many economists expecting to see 30,000 positions added during June.
Recent employment numbers have reflected the moderate growth in overall economic output. In May, 25,800 jobs were created after April’s loss of 28,900 workers.
While results of the Bank of Canada’s survey on Monday “point to an improvement in the fundamental drivers of economic growth, businesses seem less sure about the economic outlook,” said David Madani, at Capital Economics.
“We still expect GDP growth to be below the economy’s two per cent annualized potential growth rate over the second half of this year.”