Canadian Business Sentiment Picks Up on Easing Trade Tensions

(Bloomberg) -- Canadian businesses reported a slight increase in sentiment amid reduced concern about global trade conflict, according to a Bank of Canada survey.

The Ottawa-based central bank’s fourth-quarter survey of executives found indicators of future sales like new orders have picked up, particularly outside of the energy sector. Employment intentions have also increased, along with signs of businesses running up against capacity.

The composite gauge of sentiment rose to 0.74, which is the highest reading since the end of 2018 and the third-straight quarterly improvement.

Results “suggest that business sentiment is broadly positive except in the Prairies, where indicators remain weak,” the Bank of Canada said in a summary of its findings. “In aggregate, firms’ outlook is supported by expectations of healthy domestic and foreign sales.”

Key Insights

• That sentiment has improved at all may be a positive surprise for analysts, given early estimates for growth in the fourth quarter show a sharp slowdown at the end of last year
• The survey was conducted between Nov. 13 and Dec. 9, before two big breakthroughs on the global trade front -- the final signing of the North American free trade agreement and the announcement of a U.S.-China agreement on a phase-one trade deal. That suggests there is some upside for sentiment going forward
• Bank of Canada Governor Stephen Poloz puts significant weight on the survey, which he considers an important supplement to harder economic data. The report, the last major data point before the central bank’s Jan. 22 decision, won’t be adding any pressure on the central bank to cut borrowing costs

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• The Bank of Canada said businesses seemed to be less concerned about trade tensions at the end of last year, making them less guarded about future foreign sales. Fewer respondents, for example, expected a U.S. recession
• The survey questions with the biggest improvements were around indicators of future sales and employment intentions. The share of firms planning to expand their workforce rose to 53%, the highest since the second quarter 2018. Indicators of future sales also rose to the strongest in more than a year
• “Outside the energy-producing regions, reports of improved indicators of future sales are widespread, with businesses pointing to infrastructure and resource projects, population growth, consumer spending and housing activity supporting demand for their products”
• The share of firms reporting at least some capacity pressure edged up for a third straight quarter (53%), in part because of labor shortages. That gauge is above its historical average of 43%. The data suggest “economic slack has been absorbed” and that “labor markets have tightened”
• On the down side, while businesses are reporting stronger bookings and orders, fewer firms expect sales growth to accelerate over the next 12 months. That share fell to 43%, from 48% in the previous survey. Still, that’s above the share of firms who anticipate a deceleration, at 32%
• Investment intentions also eased at the end of last year, with just 35% of businesses saying they expect higher investment in machinery and equipment. That’s the lowest since 2015. The Bank of Canada cited the fact that “‘more firms than usual reported having just completed large investment projects last year”
• The Bank of Canada released its inaugural Canadian Survey of Consumer Expectations. The fourth-quarter survey showed the weakest readings for year-ahead inflation and wage growth since the end of 2017. At the same time, consumers are expecting faster spending growth over the next 12 months

--With assistance from Shelly Hagan and Erik Hertzberg.

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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