CA: BOC Business Outlook Survey

Mon Jan 08 09:30:00 CST 2018

According to the Bank of Canada's Business Outlook Survey, business sentiment remains positive and the sales outlook, although moderating, still remains healthy. At the same time, capacity and labour pressures are becoming more apparent and are stimulating firms' employment and investment plans since the previous survey. Survey results suggest that economic slack is now largely limited to the energy-producing regions.

Expectations for sales activity remain positive but point to some moderation ahead. Following broad-based strength in past sales, many firms expect stable sales growth or a return to a more sustainable pace, particularly in the goods sector and in demand from domestic customers.

The indicator of investment intentions over the next 12 months bounced back to near-post-recession highs. Plans to increase investment are broad-based across all regions and sectors. Several respondents are seeing favorable demand conditions and higher capacity pressures, and are reporting plans to expand capacity in response. Others are investing as part of multi-year projects or to catch up from a period of low investment. Yet, some factors continue to weigh on firms' plans -- tax and regulatory hurdles are mentioned more often, and a few firms also cited uncertainties around US trade policy, among other factors.

Firms expect growth of input prices to rise thanks to gains in commodity prices. Pass-through of input costs and emerging wage pressures to output prices remains limited due to competitive forces. Inflation expectations are modest and unchanged from the third quarter. After moving up in the autumn survey, inflation expectations are largely unchanged. A slight majority of firms continue to see inflation hovering in the lower half of the Bank's inflation-control range with past inflation trends most frequently shaping their expectations. A number of the firms anticipating somewhat higher inflation cited rising labour costs, particularly minimum wage increases. The responses to this survey fall within the BoC's inflation control range.

Apart from higher prime rates, credit conditions are largely unchanged.

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.