CA: BOC Business Outlook Survey

Mon Jul 06 09:30:00 CDT 2015

The BoC's updated Business Outlook Survey shows the economy still struggling last quarter to recover from the effects of the oil price crash. In particular, while recent and expected sales both show positive readings, the latest levels are still low.

Hence, the balance of firms reporting stronger annual sales growth fell from 25 percent in the first quarter to 12 percent, its weakest mark since the second quarter of 2014. At the same time, expectations for the year ahead rose to 8 percent and so only reversed most of the previous period's decline. Meanwhile, planned investment in plant and machinery (7 percent after 4 percent) remained well short of its post-recession highs and a similar story held true of employment expectations (26 percent after 20 percent).

Capacity measures were mixed with a balance of 10 percent seeing a significant difficulty in meeting a surprise increase in demand, up from 5 percent in January-March, but labour shortages (19 percent after 21 percent) less of an issue. Input costs over the year ahead (minus 26 percent after minus 1 percent) slumped to their weakest point since the first quarter of 2009 and output price inflation (minus 13 percent after 5 percent) similarly fell sharply. Not surprisingly therefore, CPI inflation expectations were downgraded slightly further and some 69 percent of respondent's now see the annual rate averaging 2 percent or less over the next two years.

Lastly, credit conditions (minus 10 percent after minus 11 percent) were also thought to have eased again and at much the same pace as in the first quarter.

With the economy needing cumulative growth of 0.5 percent in May/June for total output last quarter just to match its first quarter level, today's findings hardly make reassuring reading. The central bank's next policy-setting meeting in on 15th July and while most do not currently see any move on official interest rates then, a weaker than expected employment report on Friday might yet be enough to tip the balance.

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.