Bank of Canada Survey Points to Healthy Business Sentiment -- 2nd Update

By Paul Vieira Features Dow Jones Newswires

Canadian firms' outlook for sales growth remains healthy, while investment and hiring intentions have cooled from the previous quarter, the Bank of Canada said Monday.

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The results of the central bank's quarterly business-outlook survey, conducted Aug. 24 to Sept. 19, indicate Canadian economic growth is slowing somewhat after a stellar 12-month run, capped off by 4.5% annualized growth in the second quarter. Still, firms indicated the sales outlook "remained firmly positive," and companies expect pressures on their production capacity to intensify over the next 12 months.

"Prospects for the coming 12 months remain robust," the central bank said in explaining the findings of the survey. "A large majority of firms foresee a rise in sales volumes, with some further pickup in sales growth, suggesting that growth is becoming entrenched."

Overall, a gauge measuring the main survey questions suggested declined from an elevated level in the previous quarter, "but remains positive and continues to point to healthy business sentiment," the central bank said.

The Bank of Canada gives considerable weight to the survey results when crafting interest-rate decisions, because they capture intentions and managers' attitudes that don't necessarily show up in lagging macroeconomic data. The central bank's next rate decision is scheduled for release Oct. 25, at which time it will release an updated economic outlook.

The Bank of Canada is expected to leave its benchmark policy rate unchanged next week, after two consecutive rate increases in July and September, based on cautious signals from central-bank officials, including Gov. Stephen Poloz.

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In September, Mr. Poloz said the Bank of Canada would be "particularly data-dependent" in making rate decisions, given the uncertain outlook for inflation. This past weekend, Mr. Poloz told reporters on the sidelines of International Monetary Fund meetings in Washington that the Canadian economy -- the top performer among Group of Seven economies in the past year -- would moderate in the second half of the year, and the central bank would proceed cautiously.

"The more subdued tone of the survey highlights that there's no rush for another hike from the Bank of Canada," said Benjamin Reitzes, economist at BMO Capital Markets. "However, building capacity pressures and still positive expectations, even if more subdued, point to continued rate hikes, just at a more cautious pace than we've seen so far."

The central bank said there were notes of caution among survey respondents. Some believe a rebound in energy production is tapering off because oil prices remain too low. Other companies reported elevated worries about U.S. trade policy, as the Trump administration seeks major changes to the North American Free Trade Agreement.

According to the survey, 42% of firms expect their sales volume to accelerate at a faster pace over the next 12 months compared with the previous 12-month period, while 35% said their sales-volume growth would slow. An indicator measuring future sales prospects -- incorporating figures such as new orders -- slipped but remained near a multiyear high.

On investment plans, 41% of firms expect their spending on machinery and equipment to grow over the next 12 months, while 24% said they would decline. The central bank said investment plans "receded closer to [their] historical average." Meanwhile, an indicator of hiring intentions also fell back after surging in the previous survey, although it remained positive and particularly elevated in the services sector, the bank said. An indicator measuring labor shortages reached its highest level since the 2008-09 recession, the bank said.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

October 16, 2017 15:49 ET (19:49 GMT)