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Bank of Canada’s Business Outlook Survey Points to Higher Inflation

The Bank of Canada released its third quarter business outlook survey on Monday last week. The data showed that Canadian firms were upbeat on the third quarter. The BoC’s Business Outlook Survey (BOS) indicator was at elevated levels despite easing to 2.8 from 3.1 previously.

The business outlook survey was done between August 24 and September 19 and the survey period comes just before Canada negotiated the revamped North American Free Trade Agreement (NAFTA) to the newly formed USMCA trade deal.

The survey’s opinions showed that futures sales would rebind 15% from 6% that was seen in the second quarter of this year. Businesses said that they anticipate strong growth in the U.S. over the next year as it helps to boost exports from Canada.

However, in contrast, another indicator of future sales which captures order books and advanced bookings showed the index easing to 40% after it surged strongly over the past two consecutive quarters.

Investment intentions saw the balance of opinions rising to 33% after it fell for two consecutive quarters this year. The 33% increase was the highest since 2017’s first quarter report. The details showed capacity constraints were helping to drive investment intentions higher. Firms were also seen to be on a drive to improve the production efficiency.

Only a few firms intend to maintain their current capital base. Domestic and foreign demand was seen as the critical drivers for investments. However, there was some uncertainty surrounding the regulation and taxes, firms that participated in the survey reported.

Capacity expansion was also seen pushing firms to increase hiring in the next 12 months. However, this might come as a challenge due to labor shortages which have become widespread in recent months. The balance of firms showed a 50% reading, reporting more labor shortages and the index rose to the highest level since the third quarter of 2006.

Capacity pressures were also seen to be rising as a result of labor shortages alongside the higher tariffs on steel and aluminum exports to the United States. The higher commodity prices were seen feeding through into the expectations.

Firms expect input costs to rise at a faster pace next year. As a result, firms are said to raise output prices with about 70% firms expecting inflation to rise in the 2% – 3% range next year. Competitiveness concerns are expected to keep inflation in check among firms.

Overall, the BoC’s business outlook survey showed that firms were bullish about the future. The boost in investment intentions corresponded to higher capacity pressures. This is expected to help alleviate concerns about firms not being able to meet the anticipated increase in domestic and foreign sales.

The anticipated shortage of labor is also expected to boost wage pressures alongside pushing inflation higher in the next few months.

The Bank of Canada will be holding its monetary policy meeting on October 24. The central bank hiked the interest rates at its previous meeting in September. Canada’s interest rates currently stand at 1.75%.

Interest rates have been steadily rising in Canada since July 2017 which kickstarted a tighter monetary policy. The Bank of Canada had previously lowered interest rates to 0.50% in July 2015 amid a plunge in oil prices.

Last week, Canada also reported on its monthly inflation figures. Data showed that consumer prices fell 0.4% on the month. On a yearly basis, Canada’s inflation rate was seen at 2.2%. This was the slowest pace of increase in four months.

However, the decline in consumer prices was seen to ease the pressure off the Bank of Canada officials.

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