Canadian businesses reported a more somber mood in early 2019, as reported by the Bank of Canada’s Business Outlook Survey (BOS). The summary measure (‘BOS Indicator’) fell to -0.6 (from 2.2 previously), returning to negative territory for the first time since late 2016. Key headwinds are a more uncertain outlook, notably in the energy sector and some housing-related areas, as well as global trade tensions. A special section reported that firms now, by and large, expect only slow growth in the U.S.

Firms’ view on future sales growth relative to the past year ticked up a few points, to +6% on balance (was -1%). The BOS also reports ‘indicators of future sales’ based on order books, advance bookings, etc. This measure, at a net +14%, painted a rosier picture, but was down 13 points from its prior reading.

On the investment front, sentiment fell a notch, from +25% to +20%, still above historical norms. The Bank of Canada reported that increased spending plans are particularly widespread in the service sector, supported by domestic demand. Perhaps explaining the moderation in investment intentions was a marked drop-off in capacity pressures. The share of firms reporting ‘some difficulty’ fell 18 percentage points, to 21% – the lowest level since 2009. 10% of firms reported that they would have ‘significant difficulty’ meeting unexpected demand (down from 17% previously).

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Hiring intentions eased slightly, to a still healthy +35% as the share of firms reporting labour shortages, at 19%, was half its prior level (Q4: 37%).

Rounding out the report are pricing intentions. Firms on net reported little anticipated price pressures on either the input side, or in their selling prices. Inflation expectations swung back into the lower half of the Bank of Canada’s control range, with 64% of respondents anticipating inflation in the 1% to 2% range.

Senior Loan Officer Survey

The Senior Loan Officer Survey (SLOS) was also released this morning. On the household side, the survey indicated that lending conditions remained largely unchanged in Q1. This follows a period of tightening which began at the end of 2017 and continued throughout 2018. Banks continued to report broad-based easing in demand for all types of household loans with expectations of this trend to continue this quarter as past interest rate increases, lower consumer confidence, and somewhat softer economic fundamentals continue to weigh on demand.

After easing for six consecutive quarters, lending conditions for businesses were little changed at the start of 2019. The report noted that concerns about Alberta’s energy sector have led to a tightening of lending conditions for small and commercial businesses in that region. The demand side was also relatively unchanged after five consecutive quarterly increases.

Key Implications

That could have been better, but it could have been worse. The drop-off in the summary indicator is sure to draw eyeballs, but the details are a bit more encouraging. Indicators of demand are still in positive territory, and the balance of opinion on capital spending remains solid. What appears to be dragging things down are softer inflation and labour market components. On the latter, we aren’t terribly shocked that after adding more than 300k net jobs through March of this year, firms are now thinking about moderating the pace of hiring.

On the investment side, this report adds to some other tentative indicators that businesses are at last ramping up their investment spending. But, this comes after a string of disappointing investment reports in 2018 despite generally positive firm sentiment. These data disconnects of late suggest a grain of salt is needed in interpreting today’s report.

Within the SLOS, increased economic uncertainly and past tightening of lending conditions appeared to be on the mind of both consumers and businesses at the start of year. While interest rates are expected to remain steady this year, household sector borrowing will likely remain modest as households contend with past interest rate increases, tighter mortgage lending standards and softer economic conditions in parts of the country. Business lending is also likely to begin decelerating following a period of brisk growth in prior quarters.

It seems like a safe bet that the Bank of Canada will share our view of the report. It is no surprise that as investment has disappointed, the Bank has dropped references to the ‘rotation’ of growth sources from its communication and shifted to a more dovish tone. While we wouldn’t characterize this report as overly weak, that nearly every component softened suggests little reason for the Bank of Canada to change its current ‘wait and see’ stance.

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