Business Sentiment Picks Up, Defying Trade Tensions

(Bloomberg) --

Canadian business reported an increase in sentiment in the second quarter, as pessimism about the domestic outlook and foreign sales fades.

The Ottawa-based central bank’s summer survey of executives showed a stronger outlook for future sales than the previous poll three months earlier, along with rising capacity constraints and expectations for price increases. That’s despite concern about global trade headwinds.

The composite gauge of sentiment turned positive, after dropping to its lowest since 2016 earlier this year.

“Results from the summer Business Outlook Survey point to a slight improvement in business sentiment after a moderation in the previous survey,” the Bank of Canada said in a release.

More businesses are citing domestic demand, foreign sales and price environment as factors supporting sales. On the negative side, the central bank said weakness in the oil sector and global trade headwinds are holding sales back.

Key Insights

• The strengthening picture for business sentiment is a surprise given continued worries about trade tensions, suggesting executives are zeroing in more on the improving domestic data. Many economists had expected the report to show a continuation of soft sentiment reported three months ago
• Bank of Canada Governor Stephen Poloz puts significant weight on the survey, which he considers an important supplement to harder economic data. The survey, however, suggests both soft and hard data are telling the same story of a rebounding economy, keeping pressure off the central bank to match any easing trend in other advanced economies
• Today’s business outlook report will bolster confidence the economy will be able to maintain momentum into the second half of 2019. Statistics Canada reported earlier Friday gross domestic product rose 0.3% in April, after a 0.5% gain in March. After stalling at the end of last year and the start of 2019, the economy is now on track for annualized growth of above 2% in the second quarter. That’s well above Bank of Canada expectations for a 1.3% gain

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• The BOS indicator rose to 0.19 from -0.65, which is slightly above historical average but still well below recent highs.
• There was a sharp decline in companies expecting a slowdown in sales growth. The share of executives seeing a slowdown fell to 21%, from 34%. There was a slight increase in executives expecting faster sales growth. Other indicators of future sales also rebounded over the past three months
• Another big move was in recovering capacity pressures for businesses. The share of companies reporting they would have some or significant difficulty meeting an unexpected increase in demand rose to 42%, from 31% three months earlier. It’s now at about its historical average. Reports of labor shortages also rebounded somewhat, but remain below average
• Investment intentions were little changed, but remained above historical averages. Employment plans were also little changed, and are hovering at hear historical averages. “Investment and hiring intentions continue to be healthy,” the bank said.
• More businesses are also expected an acceleration in price increases for their products, while fewer see a slowdown

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier

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