Highlights:
- The survey was upbeat with business investment intentions rising despite the survey being conducted prior to the U.S., Canada, and Mexico agreeing to a NAFTA replacement earlier this month.
- Capacity constraints and rising current demand remained the most important drivers of business investment activity
- The data should only further cement expectations for a gradual Bank of Canada rate hiking path to continue
Our Take:
Businesses remained upbeat in the Bank of Canada’s Q3 (Autumn) Business Outlook Survey — and that despite interviews being conducted before the U.S., Canada, and Mexico agreed on a NAFTA replacement earlier this month. Indeed, the survey broadly supported the view that increasing domestic capacity constraints and tight labour markets had become a more significant impediment to growth than trade uncertainty, even before the NAFTA renegotiation resolution. US trade policy was cited as a concern for some businesses but overall machinery and equipment investment intentions nonetheless jumped higher — driven by strong demand (including export demand) and the need to expand existing capacity. More than half (56%) of firms reported they would have trouble boosting production to meet unexpected demand. Labour shortages became more widespread and more intense in the Q3 survey. Of course not all trade concerns have gone away with remaining U.S./Canada steel and aluminum tariffs in particular reportedly having some upward impact on input prices. Some, although not all, of those costs are still expected to be passed on to output prices. Most businesses (62%) continued to anticipate consumer price inflation to be at or above the 2% midpoint of the Bank of Canada’s 1% to 3% inflation target range.
In terms of near-term policy implications, a soft survey result in Q3 would likely have been discounted given NAFTA renegotiation concerns over the survey period have now eased. In the event, a firmer report only further cements the odds that the Bank of Canada will remain on a gradual rate hiking path with the next 25 basis point hike to the overnight target rate coming at next week’s policy meeting.
