CA: BOC Business Outlook Survey

Mon Apr 06 09:30:00 CDT 2015

The BoC's updated quarterly Business Outlook survey paints a relatively sombre picture of economic activity. In particular financial markets will note downward revisions to expectations for sales, investment and hiring intentions as well as a softer prognosis for inflation since the last edition in January.

Actual sales have picked up over the last three months with a balance of 25 percent signalling faster annual sales growth after a 21 percent majority last time. However, the forecast balance has halved to 4 percent, its weakest reading since the third quarter of 2012. Against this backdrop investment intentions have been similarly pared back (4 percent after 8 percent) while the expected addition to headcount (20 percent after 31 percent) saw its worst post in some six years.

Pressures on capacity appear little changed overall. Hence, a 5 percentage point increase to 38 percent in the balance anticipating some difficulty meeting an unforeseen rise in demand contrasts with a 2 percentage point fall to 5 percent in the majority seeing significant problems. Accordingly labour shortages (21 percent after 22 percent) were essentially flat.

The balance for forecast input cost inflation over the coming year eased from minus 1 percent to minus 3 percent but output prices firmed by 10 percentage points to 5 percent reflecting, at least in part, the weakness of the local currency. Meantime inflation expectations remain centred below 2 percent with some 66 percent of respondents seeing annual CPI growth of below this mark over the next two years.

Lastly the balance of opinion indicated a further loosening of credit conditions since January (minus 11 percent after minus 3 percent).

There are not too many surprises in today's results. The slump in energy prices has clearly hit the economy hard but many firms see cheaper fuel costs and a more competitive C$ as a net positive. Nonetheless, a dovish BoC stance means that another cut in official interest rates remains a real possibility later in the year.

The survey's purpose is to gather the perspectives of these businesses on topics of interest to the Bank of Canada (such as demand and capacity pressures) and their forward-looking views on economic activity. The report is based on a summary of interviews conducted by the Bank's regional offices with the senior management of about 100 firms, selected in accordance with the composition of Canada's gross domestic product.

The outlook survey is used to evaluate economic conditions prior to four Board meetings a year where the BoC sets interest rate policy. Although monetary policy is announced eight times a year, these reports are available only on a quarterly basis. Market participants speculate for weeks in advance about the possibility of an interest rate change that could be announced upon the end of these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.

If the survey portrays an overheating economy or inflationary pressures, the Bank of Canada may be more inclined to raise interest rates in order to moderate the economic pace. Conversely, if the survey portrays economic difficulties or recessionary conditions, the Bank of Canada may see the need to lower interest rates in order to stimulate activity.