CA: BOC Business Outlook Survey

October 7, 2016 09:30 CDT

Compared with its July's edition, the BoC's new Business Outlook Survey paints a generally more upbeat picture of Canadian economic activity at the start of the new quarter. In addition to seeing a pick-up in demand, businesses now seem slightly more optimistic about prospects for the year ahead. Nonetheless, inflationary pressures remain muted.

The balance of retailers reporting an increase in yearly sales crept up from 0 percent to 1 percent, its first positive reading since the second quarter of 2015. Moreover, expectations for the year ahead also improved, October's 12 percent print a tidy 7 percentage points above its July reading.

Corporates have also become a little less bullish about their investment plans with a net 18 percent signalling their intention to boost spending on machinery and equipment versus just 9 percent in the previous two surveys. Planned hiring (31 percent after 21 percent) moved in the same direction. Meantime, indications of capacity constraints were little changed with a majority of 38 percent reporting either some, or significant, difficulty in meeting a surprise rise in demand, down from 35 percent last time. Labour shortages were similarly slightly less intense.

Not surprisingly therefore, prospects for inflation remained quite subdued and, indeed, slightly softer than last time. Hence, lower output price inflation was anticipated by a net 10 percent, up 7 percentage points, while the balance anticipating a CPI inflation rate above the target 2 percent midpoint dipped from 29 percent to 22 percent.

Lastly, credit conditions eased again albeit not by quite as much as in July.

Today's employment report and PMI survey (see calendar entries) were both consistent with a significant rebound in third quarter real GDP growth and the new BoC survey provides additional support for this view. However, it also noted slightly weaker inflation expectations which will loom large on the central bank's radar. To this end, while a steady monetary policy through year-end looks most likely, the potential for additional accommodation cannot be ruled out altogether.

The Bank of Canada's (BoC) publishes a quarterly Business Outlook Survey 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 (GDP). The survey's purpose is to gather the perspectives of these businesses on topics of interest to the central bank (such as demand and capacity utilisation) and their forward-looking views on economic activity. Since the BoC is charged with keeping inflation within a specified target range, information on price pressures is watched particularly closely.

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.