Canada’s recent economic slowdown and global trade tensions have begun to impact businesses confidence, according to the Bank of Canada’s latest Business Outlook Survey released last week.
The central bank’s first-quarter survey of executives, which took place in February and March, showed softening expectations for sales along with a sharp decline in the number of companies reporting labour shortages. The Bank of Canada’s composite gauge of sentiment turned negative and dropped to its lowest since 2016.
The softening picture reflects how the confluence of headwinds — from global trade wars, to last year’s slump in oil prices and a sluggish housing market — is beginning to ripple through the nation’s economy.
The report will only reinforce expectations the central bank will keep interest rates on hold indefinitely.
“The main headwinds are a more uncertain outlook in the Western Canadian energy sector, continued weakness in housing-related activity in some regions, and tangible impacts from global trade tensions,” the Bank of Canada said in the report in which it described the deterioration in sentiment as a “softening.”
Bank of Canada Governor Stephen Poloz puts significant weight on the survey, which he considers an important supplement to harder economic data. The survey provides insight into everything from investment intentions to the amount of slack in the economy and inflation expectations, and last week’s report was almost universally negative.
More businesses reported their sales growth decelerated over the past 12 months, while expectations for future sales remained depressed.
The share of companies reporting at least some difficulty in meeting increased demand fell to 31%, the lowest since 2015. Readings on labour shortages also weakened to multi-year lows, while inflation expectations showed a marked softening. About two-thirds of all executives surveyed expect inflation won’t surpass 2% over the next two years.
One positive is investment and employment intentions remain robust, even though there was some softening for these questions as well. Among those surveyed, 39% said they expect to increase spending on machinery and equipment, which is about the historical average but down from recent levels.
Almost half the executives surveyed said they expect to raise employment levels over the next 12 months.
The survey also found expectations for growth in the U.S. moderating. The share of businesses anticipating slow growth in the U.S over the next 12 months rose to 70% in the survey, from 42% three months earlier. In the winter, about half of respondents expected “strong” U.S growth over the next 12 months. That figure now is 17%. Very few predict a recession, however.
“We see a soft (Business Outlook Survey) indicator causing the Bank of Canada to move to a purely neutral bias at this week’s rate meeting,” Mark Chandler, head of Canadian rates strategy at RBC Dominion Securities Inc., advised his clients on April 15.
The report “could have been better, but it could have been worse,” wrote TD Bank economists Brian DePratto and Ksenia Bushmeneva.
Some companies are pushing through the headwinds better than others. The Bank of Canada survey noted specifically that companies in Quebec continued to report “solid” sales prospects. Bensadoun said he had taken advantage of Canada’s new trade agreement with the European Union to double imports from Europe, and that he would avoid the tangle between the U.S. and China by sourcing Asian production from Vietnam.
Investment intentions outside the Prairies “remain healthy,” the Bank of Canada survey said.
But the Prairies are an important part of the economy, and until those provinces shake off the effects of weaker energy prices, the central bank will have a reason to leave interest rates low.
After oil collapsed in 2014 and 2015, the Bank of Canada predicted that it would take three to five years for the shock to wear off. But according to anecdotal evidence, the drag from weaker crude prices continues. Mullen reduced his exposure to oil, but he can’t do anything about weaker economic growth. His strategy involves acquisitions that will allow Mullen to become more efficient, but he concedes that each time he buys a company, people will lose their jobs.
“What I’ve observed is that companies are finding many ordinary, and many more exotic ways, to reduce their costs,” Poloz said in Washington. “They are adjusting to a lower-prices world, but from what I’m hearing, that isn’t done.”
Source: Bloomberg News, The Financial Post