Canadian firms reported generally positive sentiment during the first quarter of 2018, according to the results of the Bank of Canada’s quarterly Business Outlook Survey (BOS) released this morning. Consistent with this, the summary “BOS indicator”, was down just slightly, to 2.0 (from 2.5), still above its 2017 average.
Looking at the details, the balance of opinion on future sales rose slightly, with 16% of firms expected a sales acceleration on balance. Similarly, the future sales indicator, which takes order books, sales inquiries and similar information into account remained strong, rising slightly to 40% (was: 34%). The associated commentary suggested that “several” firms expect a moderation in sales growth to a more sustainable pace, while firms in the energy sector reported expectations of a slowing pace of recovery.
Investment intentions remain strong, with nearly 30% of firms on net reporting plans to increase the pace of spending in the coming year. This was a 12 percentage point increase from the prior quarter, as the share of firms reporting higher spending rose and the share planning to slow spending fell. The service sector appears to be leading the way, encouraged by strength in demand.
When it comes to labour, the balance of firms planning to expand employment remained in solid territory (40%; was 34%). Both the incidence and intensity reported of labour shortages remained high, with firms in B.C. and Central Canada reporting difficult hiring conditions, including in lower-paid/lower-skill occupations.
When it comes to prices, firms are expecting a rise in input price growth, citing commodity prices, taxes, and minimum wage increases. On the output side however, the balance of opinion was only slightly positive, with some firms reporting competition as limiting their ability to raise prices. Importantly for the Bank of Canada, the share of firms expecting inflation in the coming two years to fall in the 2% to 3% range rose to 53%, although no firms reported expectations of inflation above the 3% mark.
Senior Loan Officer Survey
The Senior Loan Officer Survey, released simultaneously with the BOS, indicated a slight easing of lending conditions, led by price conditions. Demand for credit was up again for a second quarter, with market access improving slightly across the risk spectrum.
This quarter marked the first report of household credit conditions, following a year of surveys. Household lending conditions tightened in the first quarter of 2018 on the back of tighter mortgage-lending standards. Demand reports were mixed, with some lenders reporting a pull-forward of applications, while others saw a decrease in demand. Survey respondents expect a decrease in demand both for mortgages and home equity lines of credit in the current quarter.
Key Implications
This was a surprisingly solid report. It is important to remember how the survey is designed: the questions are not in absolute terms, but in relation to the year that was. The strength of 2017 clearly makes a high hurdle to surpass, but firm optimism nevertheless remains solid, both on the outlook for sales and investment.
Indeed, the level of optimism is even more impressive considering the backdrop of NAFTA negotiations, and protectionist threats from south of the border. This may help explain why it was the typically more domestically-oriented services firms that reportedly led the way on investment intentions.
The Bank of Canada has its work cut out for it. It is clear that they will raise rates again, but the question is when and how rapidly. Arguing for quick action are an unemployment rate at a record low and measures of core inflation that have reached the Bank’s inflation target. On the ‘caution’ side of the ledger are policy-led gyrations in housing markets, what looks likely to be a slow start to the year for economic growth, and ongoing NAFTA uncertainties – not to mention potential challenges disentangling minimum wage impacts from the overall inflation picture.
Clearly though, today’s report likely falls on the ‘quicker action’ side of the ledger. Despite this, it is hard to imagine that next Wednesday’s rate decision will see the next hike given still elevated uncertainty. Rather, the rate decision and Monetary Policy Report will be an opportunity for Governor Poloz to provide an update on how he sees the economic outlook evolving and a sense of the ‘thresholds’ to be surpassed before the next rate increase.
