The BoC's new Business Outlook Survey paints a relatively subdued picture of the Canadian economy last quarter. Following a decent, albeit heavily front-end loaded, first quarter, business activity looks to have slowed and manufacturing companies are notably less optimistic about the outlook.
In terms of recent sales, there was a zero percent balance on the number of respondents reporting a rise in annual growth of volumes, up from minus 4 percent in the first quarter but still historically weak. More worryingly, net anticipated sales growth over the coming year was just 5 percent, down from 16 percent last time and the weakest reading since the first quarter of 2015. Those regions where the oil industry is particularly prominent were especially cautious.
Against this backdrop, investment intentions (9 percent) were unchanged but the balance of companies expecting to make a net addition to headcount (21 percent after 26 percent) fell further below post-recession levels, a decline that was especially marked in goods producing industries. Pressures on capacity have eased and labour market indicators signal a substantial degree of slack. Output price expectations (minus 3 percent) have dipped and prospects for CPI inflation are insignificantly different from last quarter and so remain concentrated within the central bank's 1-3 percent target band. In general credit conditions have also become a little looser.
Today's results show few surprises and leave open the door to another monetary ease should the economy not pick up momentum this quarter.
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.