Sentiment among Canadian firms remained positive during the final quarter of 2018, according the Bank of Canada’s quarterly Business Outlook Survey (BOS).
The ‘headline’ indicator of the balance of firm opinion on future sales ticked down a notch (to 19% on balance, from 31% previously), but remained in positive territory. The broader-based indicator of future sales, which summarizes order books, advance bookings, sales inquiries and similar information, also ticked down slightly, but at 55% still marked its third highest reading on record (last quarter saw the second highest reading). Firms cited increased competition, notably in the retail sector as dampening the sales outlook.
On the investment and hiring front, it was a positive story. The balance of opinion on investment intentions rose to 29% as the share of firms planning to reduce investment fell. It is important to remember that these questions are relative to the past 12 months, which have seen a healthy recovery of investment activity, making today’s figures more impressive. A similar improvement was seen in hiring plans, where the balance of intentions ticked up to +40%. Hiring intentions were reportedly driven by the service sector, and by firms located in Central Canada. Firms also reported anticipating more difficulty meeting an unexpected increase in demand, with labour shortages more widely reported than in the previous survey.
On the price front, firms are now expecting an increase in the pace of input cost growth, on balance, but expect competition to limit their ability to pass these costs on (the balance of opinion on output prices was 0%). Inflation expectations remain well within the control range, but the share of firms expecting inflation over the next two years to fall into the 2% to 3% range climbed 14 percentage points.
Senior Loan Officer Survey
Released alongside the BOS, the Senior Loan Officer Survey indicated that lending conditions eased slightly as spreads on lending to corporate borrowers narrowed. This ended a five quarter run of effectively unchanged lending conditions. It was also reported that both price and non-price conditions eased in the Prairies as activity in the resource sector continued to increase. On the other side of the coin, demand for credit reportedly rose after a flat reading in the prior survey.
This was a solid report. Headline sales expectations may have ticked down a hair, but overall sentiment remains robust. This is best captured by the Bank of Canada’s summary measure (The “BOS indicator”), which rose to within a hair of its 2017Q2 reading (which presaged last year’s back-to-back rate hikes).
Reinforcing the strength, while the spectre of a poor outcome from NAFTA renegotiations continues to hang over business leaders, healthy US demand and a supportive loonie were also reported as supporting the business outlook.
Particularly interesting in the current context, additional focus was given to wage pressures. Pressure is now seen as positive in all regions, and while minimum wage changes may be driving the gain in some areas, so too are healthy labour markets that are leading to reported challenges in recruiting and retaining staff.
When the wage outlook and its underlying drivers are taken together with the tick-up in investment intentions and the healthy outlook for hiring (even more impressive in light of the recent string of strong jobs numbers), the picture that emerges is one of economic strength. Today’s report should thus provide Bank of Canada Governor Stephen Poloz with further confidence that emergency level interest rates are no longer needed, with the next policy interest rate increase to come next week (January 17th)