CA: BOC Business Outlook Survey

Mon Apr 09 09:30:00 CDT 2018

The central bank's new Business Outlook Survey found firms in reasonably upbeat mood at the start of the year. In particular, decent first quarter sales were compounded by expectations for further gains over the year ahead.

The first quarter balance of respondents reporting an increase in sales from a year ago was a solid 20 percent unchanged from its reading at the end of 2017. Moreover, expectations (16 percent after 8 percent) improved notably although they remained somewhat short of the levels seen over most of last year and in late 2016.

Confidence in the outlook ensured that investment intentions (24 percent after 29 percent) stayed elevated while hiring intentions (45 percent after 40 percent) rose for a second consecutive quarter. Pressure on capacity moderated a little but a net 47 percent still anticipated some, or significant, difficulties in meeting an unforeseen pick-up in demand. Labour shortages (26 percent after 30 percent) were a factor here.

Even so, expected output price inflation (6 percent after 2 percent) remained low and some 94 percent thought inflation over the year ahead would be within the 1 percent - 3 percent target range. Lastly, credit conditions (9 percent after minus 4 percent) were thought to have tightened but most firms still found credit relatively easy to obtain.

Today's report should leave the BoC on course for another hike in interest rates before too long. Businesses seem quite optimistic and increasingly promising news on the NAFTA talks should bolster confidence further. Inflation in February moved above target for the first time in a year and the labour market is probably close to full employment. However, the central bank does not seem to be in a rush and with first quarter economic growth seemingly on course for less than 2 percent (saar) any move may have to wait until next quarter.

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.