Positive outlook could mean rate hike
Overall business sentiment in Canada is nearly back to its summertime high, poll shows
Canada’s business outlook remained at elevated levels with signs of capacity constraints emerging in the economy, even as expectations for future sales moderate.
The overall business outlook indicator — an aggregate gauge of sentiment — rebounded to 2.49 in the fourth quarter from 0.86 in the last report, according to the Bank of Canada’s quarterly Business Outlook Survey Monday in Ottawa.
The reading is one of the highest in the past 17 years for the gauge, and has been positive for five straight quarters after eight quarters of negative readings.
“Capacity and labour pressures are becoming more apparent and are stimulating firms’ employment and investment plans,” the Bank of Canada said.
The report is the last major data point before a Jan. 17 rate decision, and could be the deciding factor for a hike following a stellar jobs report last week that showed unemployment falling to the lowest in four decades.
An increase is almost fully priced in, with a second one expected by May and at least three hikes by the end of this year.
“Overall, enough in here on the plus side to cement the case for a rate hike later this month,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a note to investors.
The Bank of Canada found that businesses are planning to expand operations in the face of “sustained demand,” reflected in a rebound in investment and hiring intentions. There is also evidence of a pickup in capacity pressures and labour shortages.
“Survey results suggest that economic slack is now largely limited to the energy-producing regions,” it said.
The weak point of the results was a drop in expectations for future sales, which the Bank of Canada said was a “return to a more sustainable pace.”
The share of firms that expect to see sales volume growth accelerate was at 39 per cent, the lowest since 2012. Those who see slower sales growth increased to 31 per cent.
The share of businesses that saw an improvement in their indicators of future sales — such as orders and sales inquiries — was 51 per cent, the lowest since 2016.
Despite the moderation, the Bank of Canada said the outlook for sales “is still healthy.” Other survey details
The survey found that businesses are expecting faster growth of input prices on higher commodity prices, though passthrough to output prices remains limited. Inflation expectations are “modest and unchanged from the third quarter.” Firms expect an acceleration in export growth as views of U.S. economic strength outweigh worries about protectionism. The indicator of investment intentions over the next 12 months has rebounded.
Employment intentions rebounded and labour shortages are becoming more common.
Recent results show that pressures on wage growth have edged up.