Firms still positive about future despite uncertainties: Bank of Canada

Outlook

Canadian firms remain upbeat about future sales, business investment and hiring even as the country faces stubborn economic uncertainties from outside its borders, a recent Bank of Canada poll suggested.

The central bank's latest business outlook survey – its quarterly poll of about 100 firms – found overall business sentiment has stayed positive and above historical averages, despite some signs the indicator crept down compared with January's results.

But despite the still-optimistic expectations a number of respondents predicted some moderation ahead as the economy shifts to a more-sustainable pace following last year's red-hot growth.

The results of the survey, conducted between Feb. 12 and March 9, will be carefully studied by the Bank of Canada ahead of its next decision on its trend-setting interest rate, which is scheduled for next week.

"Business sentiment continues to be positive, supported by healthy sales prospects," the bank said in the report.

"Due to recent strong demand, capacity and labour pressures are evident in most regions."

Central bank governor Stephen Poloz has raised the benchmark rate three times since last July, however, he's expected to proceed cautiously due to trade and competitiveness challenges as well as signs Canada's powerful economic performance of 2017 has cooled.

The survey found companies anticipated sales to grow at a faster pace over the next 12 months, but it noted several of the firms anticipated a moderation of activity following the strong performance of the past year. The responses often reflected expectations of a return to a more sustainable pace, the report said.

Senior managers at the polled firms also said they anticipated stronger sales overall from increasing U.S. demand. However, some also said they expected protectionism and reduced competitiveness could limit the benefits they see from the improving American economy.

The country has faced considerable uncertainty surrounding the negotiation of the North American Free Trade Agreement and, more recently, the potential spillover effects of a growing trade dispute between the world's two largest economies: the U.S. and China.

In recent months, business leaders have also urged governments in Canada to take steps to ease the potential sting from new competitive disadvantages caused by recent tax and regulatory reforms in the U.S.

The Bank of Canada survey, however, said most firms reported that they had yet to see negative effects from recent U.S. policy announcements themselves or the related uncertainty. It also found that most firms didn't expect a clear impact over the coming 12 months.

On investment, the poll said most firms still planned to boost spending on machinery and equipment over the next year, although the indicator edged down compared to its reading in the January survey. The responses showed plans for greater spending were most widespread in the services sectors.

The poll also found hiring intentions were "solidly positive" and had increased across regions and most sectors amid continued concerns that labour shortages had intensified over the last year.

"Labour-related constraints continue to be the most-prevalent obstacle to scaling-up operations in response to an unanticipated increase in demand," the report said.

"On balance, firms anticipate capacity pressures to further intensify over the next 12 months, pushed by strong sales prospects and expected difficulties finding labour."

Even with the positive findings throughout much of the survey, several experts still didn't expect the results to be enough to encourage the Bank of Canada to raise its rate at next week's meeting, particularly because of the persistent uncertainties – such as housing market adjustments, high consumer debt loads and trade issues.

Bank of Montreal's Benjamin Reitzes wrote in a research note that the Bank of Canada will likely view the survey as a sign that the economy continues to operate near capacity. But he said there's little rush for Poloz to increase interest rates this month with inflation pressures only gradually moving higher and the presence of uncertainties weighing on the outlook.

Reitzes added that BMO continues to project the next rate hike to come in July.

Royce Mendes, senior economist for CIBC Capital Markets, wrote in a research report that companies see a healthy underlying economy even though the data so far in 2018 has yet to paint a clear picture.

"Today's business outlook survey indicates that the economy isn't feeling all that much pain from the effects of policy changes in the U.S. and uncertainty about trade relations," Mendes wrote.

"However, this is only a survey, and it remains to be seen if the opinions expressed here are born out in hard data, which have yet to provide any clear direction."