Optimism grows, expectations for hiring positive

Julian Beltrame
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The Canadian Press

'The good Canadian news just keeps rolling,' said Derek Holt, an economist with Scotia Capital.

[OTTAWA, ON] — Business optimism in Canada is rising sharply as the gloom of the winter months appears to be giving way to better expectations for sales, hiring and investment, a new Bank of Canada survey suggests.

The quarterly survey of senior management from 100 representative firms, conducted over four weeks in February and March, found the outlook for future sales among the most positive since the recession.

It showed 58 of the respondents expected higher sales in the next 12 months, as opposed to 23 that expected fewer.

That put Bank of Canada's important measure of business confidence at a positive 35, a big turnaround from the negative four balance of opinion in its January report.

It follows an unexpectedly strong employment report last week from Statistics Canada, which said 82,000 jobs were added in March, reversing what had been a few months of modest employment reversals.

"The good Canadian news just keeps rolling," said Derek Holt, an economist with Scotia Capital.

The snap-back in business confidence, while encouraging, raises the risk of the central bank moving to hike interest rates later this year, although there is no urgency, added Bank of Montreal's deputy chief economist Douglas Porter.

For that to happen, he said, "firmer business sentiment has to translate into firmer growth."

In last month's federal budget, Finance Minister Jim Flaherty adopted the consensus forecast of 2.1 per cent growth this year, followed by 2.4 per cent in 2013 — both modest for a recovery period.

The improvement in confidence follows months of mildly positive economic data and waning risk, particularly in respect to the European debt situation. The U.S. recovery has picked up steam of late, although Friday's 120,000 new jobs number as considered a setback.

"The results of the spring survey point to more optimism among firms," said the central bank's report Monday. "With modestly improved expectations for near-term U.S. economic growth and fewer concerns about the global economic and financial situation, some of the dampening effects on sales expectations have subsided, and more firms report that recent indicators of future sales activity, such as order books and new contracts, have improved compared to a year ago."

Canadian firms are also reporting positive spillover effects from strong commodity prices for natural resources that Canada sells the world, the Bank of Canada said.

The central bank's latest survey, which was conducted between Feb. 21 and March 15, found 43 per cent of firms saying they will add employees over the next year, about the same as in January.

As well, more firms said they will increase their level of investment in machinery and equipment — a good signal for productivity and economic growth — over the next 12 months.

The central bank calls the plus-24 balance of opinion — the difference between positive and negative responses — on this question "solidly positive".

Meanwhile, firms are not reporting significantly greater capacity pressures or labour shortages, and believe both input costs and inflation will be moderate.

As well, the executives say credit conditions have eased over the past three months, which should make it easier and less expensive to fund operations and expansion.

A separate survey of senior loan officers also found that both the price and conditions for lending to firms have improved.

The business survey is one of many indicators that are likely to be considered in the Bank of Canada's new outlook for the economy, which will be published next week.

In a recent interview, governor Mark Carney described economic conditions as "a bit firmer than we had anticipated in January", and has said that the slack in the economy has tightened.

Although prospects for growth are improving, economic opinion is unanimous that there is virtually no chance Carney will lift his foot off the pedal on stimulative interest rates next week, the central bank's next policy setting date.

The bank's trendsetting interest rate has been fixed at one per cent since September 2010, even though Carney continues to express concern such easy lending conditions are luring many Canadians into high levels of borrowing.

Analysts note that the alternative would likely be worse — raising rates would slow down domestic economic activity and boost the Canadian dollar, making Canadian exports less attractive.

"We retain our expectation that the Bank will wait until next year before raising interest rates," said Leslie Preston, an economist with TD Bank.

Organizations: Bank of Canada, Statistics Canada, Scotia Capital.The Bank of Montreal TD Bank

Geographic location: Canada, U.S.

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