The central bank's latest Business Outlook Survey would seem to confirm an expected return to positive economic growth in the third quarter. However, businesses clearly remain cautious about the economic outlook and expectations for both sales and prices remain quite restrained.
The balance of firms reporting higher sales than a year ago was zero percent, down 12 percentage points from the last survey in July. However, expectations for demand over the coming year have improved somewhat, rising to a still relatively subdued 16 percent from 8 percent last time. Accordingly, planned investment (14 percent) was also up from last time (7 percent), albeit similarly well short of most of the readings seen over much on 2014. Much the same applied to employment intentions (28 percent after 26 percent).
Meantime, capacity pressures eased somewhat. Hence, 25 percent of respondents saw some problem in meeting an unforeseen rise in demand and just 3 percent severe difficulties compared with 37 percent and 10 percent respectively last time. Perceived labour shortages (minus 14 percent after minus 19 percent) were broadly stable and so remained at a low level.
Nonetheless, inflationary expectations recovered after a hefty drop in July. At 10 percent, the balance of firms anticipating an acceleration in selling prices over the next twelve months was up 23 percentage points, in large part reflecting the feed-through of the weaker local currency. That said, in general CPI inflation expectations were little changed with 7 percent seeing an annual rate below 1 percent in the year ahead, up from 3 percent, and 63 percent anticipating a rate between 1-2 percent, down from 68 percent.
Lastly credit conditions (7 percent after minus 10 percent) were seen to have tightened for the first time since the fourth quarter of 2013. However, most of this looks to have been associated with the energy sector and many businesses saw a further easing.
In sum, the BoC's new survey paints only a slightly more upbeat picture than in July. The economy is on the turn but only slowly and in the absence of any real underlying inflation pressures the central bank has the room to ease again should future conditions so dictate.
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.
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