BoC Survey Joins List of Indicators Pointing to Stronger Canadian Economy

Highlights:

• The future sales measure inched lower but remained above its long-run average the long-run average. The ‘indicators of future sales’ measure rose to a 5-year high.
• Hiring intentions rose for a third consecutive quarter and business machinery and equipment investment intentions jumped to their highest level since Q3 2010 (and matched the second-highest level on record)
• Capacity pressures tightened modestly although indicators of labour shortages eased.
• 94% of respondents expected inflation in the 1% to 3% Bank of Canada target range. That is up from 89% in Q4/16 and with the increase reflecting more respondents expecting growth in the top 2%-3% half of the range.
• Credit conditions eased modestly both from the borrower’s perspective and the lender’s perspective (from the concurrently released Senior Loan Officer Survey)

Our Take:

The data from the Q1 BOS remains consistent with earlier indicators (GDP growth, for example, is on track to outpace U.S. growth for a third consecutive quarter in Q1/17) pointing to a firming in the Canadian economic backdrop. Expectations for future sales growth moderated but held above long-run average levels and hiring intentions improved for a third consecutive quarter (consistent with strong labour market improvement to-date in 2017). Perhaps most encouragingly, business investment intentions surged to their highest level since Q3 2010, and matched the second-highest reading on record, despite reports of significant uncertainty around the outlook tied to potential trade disruptions and changes to U.S. taxation that could hurt Canadian competitiveness. The business investment intentions in the BOS survey are in sharp contrast to a pull-back in private business investment intentions in a closely-watched annual CAPEX intentions survey from Statistics Canada. The indicator of labour market shortages did tick lower but overall capacity pressures tightened slightly. Bank of Canada Governor Poloz remained adamant last week that, notwithstanding a run of good economic data, the economy continues to run well-below its long-run production capacity. Today’s BOS report will not necessarily change the Bank’s view ahead of next week’s policy decision; however, the longer the run of stronger economic data persists, the harder that position will be to defend.