Business sentiment remains subdued: Bank of Canada

• After a period of weak demand, firms expect their sales growth to improve over the coming year. This expectation is largely driven by recent interest rate reductions and the anticipation of further cuts ahead.
• With lower financing costs and improving demand outlooks, intentions to increase investment have become more widespread among firms. Part of this is a resumption of previous plans that were postponed.
• Most businesses reported having some spare capacity. Because of this, hiring plans remain modest. Binding labour shortages are not widespread, and most firms describe the availability of outside labour as improved compared with one year ago.
• Growth in firms’ selling prices has stabilized, while growth in wages and other input costs continues to ease. Inflation expectations have moved up slightly in recent months but remain within the Bank of Canada’s target range.
• Uncertainty about the effects of the new US administration is prevalent, with firms commonly anticipating higher input costs due to trade tensions.

“There are, however, signs of emerging optimism, with business activity showing tangible improvements from its low level. These improvements are driven by lower interest rates and lower inflation. In this context, only 15% of firms are planning for a recession in Canada over the coming year, unchanged from last quarter but down significantly from the 38% of firms that reported this 12 months ago,” it said.

Mario Toneguzzi