Business sentiment brightens

Increased investment, more hires expected: Bank of Canada
By Louise Egan
|hrreporter.com|Last Updated: 04/10/2012

OTTAWA (Reuters) - Canadian business sentiment on future sales rose to its highest level in two years in the first quarter, and companies also expect to increase investment and hire more staff, according to the Bank of Canada's spring survey.

The percentage of companies that see the inflation rate at between two per cent and three per cent, the upper end of the central bank's one to three per cent target range, rose to 63 per cent from 51 per cent, the most since 2007.

However, other indicators showed little pressure on inflation. Businesses reported some easing of capacity pressures, contrary to analysts' expectations, and slightly fewer had labour shortages, found the survey.

The percentage reporting they would have some, or significant, difficulty meeting an unexpected increase in demand fell to 39 per cent from 46 per cent in the bank's winter survey.

"Some firms, notably those in the services sector, reported that they could accommodate higher demand because of earlier investments to expand capacity or because they have flexibility in adjusting the scale of their operations," the bank said in its release.

The balance of opinion on employment is essen­tially unchanged and indicates firms plan to raise employment over the next 12 months, said the Business Outlook Survey. Most firms expecting to expand their workforces cited the need to support current or expected sales growth which, in some cases, was related to strategies to increase market share. 

“The results of the spring survey point to more optimism among firms than in the winter survey, as some of the uncertainty dampening the eco­nomic outlook has dissipated.”

Market players watch the survey data for clues about the Bank of Canada's next interest rate move. The bank has sounded a bit more hawkish in recent statements, prompting talk of a rate hike this year rather than next, as most analysts have forecast.

"Overall, the firmer growth expectations fit well with other recent surveys, but the tame inflation readings should leave the Bank of Canada in no hurry to start tightening just yet," said Avery Shenfeld, chief economist at CIBC World Markets.

While business sentiment on inflation and sales could add pressure on the bank to raise rates, the easing of capacity pressures suggests there is no rush to do so.

The upbeat view on sales was the most marked change in the survey, in which the bank conducted interviews with senior managers at 100 companies.

Fifty-eight per cent said they expected sales to grow at a faster pace in the next year than in the past year, versus 37 per cent who expected that in the December-January period.

The balance of opinion — the percentage of companies expecting faster growth minus the percentage expecting slower growth — rose to 22 from negative four previously. That was the best showing since the first quarter of 2010.

The bank's next rate announcement is April 17, followed by its quarterly economic projections the next day.

It has held its key rate unchanged since at 1.0 per cent since September 2010, and primary securities dealers forecast, on average, no change until the third quarter of 2013.

Overnight index swaps, which trade based on expectations for the policy rate, show traders slightly lowered their bets of a possible rate hike this year following the release of the Bank of Canada's surveys.

A separate survey of senior loan officers showed overall lending conditions eased for businesses in the first quarter.

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