CA: BOC Business Outlook Survey

Fri Jun 30 09:30:00 CDT 2017

By and large, the BoC's new Business Outlook Survey paints a reasonably upbeat picture of Canadian economic activity. The economic outlook is seen improving across both sectors and regions and inflationary pressures have increased. Its measure of business sentiment hit its highest level since the second quarter of 2011.

The balance of respondents signalling a yearly increase in sales was 20 percent, up some 18 percentage points from the last report in April. Expectations similarly improved sharply, gaining 10 percentage points to 31 percent, their highest mark since the third quarter of 2014.

By contrast, investment intentions were slightly less bullish with a majority of 29 percent anticipating increased spending versus the last year compared with 35 percent in April. However, the BoC noted that this was still historically firm. With a balance of 58 percent, the planned net increase in headcount was very robust and fully 20 percentage points above April. This may reflect capacity issues with a balance of 46 percent (up from 39 percent) anticipating problems meeting any unforeseen pick-up in demand. Labour shortages (31 percent after 1 percent) were also a feature.

Expected output price inflation (14 percent after minus 3 percent) rebounded sharply after falling in April but expectations for year-ahead CPI inflation above 2 percent eased from 32 percent to 25 percent.

Lastly, credit conditions (minus 1 percent after minus 2 percent) were viewed as little changed.

Following a respectable, if less than sparkling, start by the real economy to the second quarter (see today's GDP calendar entry), the new BoC survey will probably boost speculation about monetary tightening over coming months.

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.