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Bank of Canada report isn't all doom and gloom Add to ...

Inflation outlook improves

Canada’s business community is growing gloomier. The Bank of Canada’s autumn Business Outlook reports a swing to a less optimistic mood, no doubt due in part to deteriorating global economic conditions, says Krishen Rangasamy of National Bank Financial Group.

And yet there is a positive element to be found in the latest BoC report: a decline in inflation expectations.

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“The third quarter actually saw the largest quarterly decline since the recession in the proportion of respondents expecting inflation above 3 per cent,” he writes in a recent report.

Eighty-eight per cent of respondents, up from 80 per cent in the summer, see inflation staying in the BoC’s 1-to-3 per cent target range.

There is also an easing of capacity pressures, with only 35 per cent of firms – compared with 46 per cent in the summer – encountering “some difficulty” in meeting an unexpected increase in demand.

“That suggests a higher likelihood that wage inflation will remain tame over the near to medium term,” writes Mr. Rangasamy.

“All told, the report backs the BoC’s patient approach on monetary policy, despite an above-target headline CPI inflation rate.”

No panic in housing market

Turmoil? What turmoil? Canadian home buyers apparently aren’t letting nerve-racking world events rattle them.

The latest data from the Canadian Real Estate Association (CREA) indicate that Canadians maintained a steady-as-she-goes attitude to the housing market, says Robert Hogue, senior economist with RBC.

Home resales were flat in August, relative to July, and rose by 2.7 per cent in September, with the majority of provincial markets posting gains, he says in a recent analysis.

This slight increase in resale activity resulted in tighter market conditions but not to the extent of upsetting a generally balanced supply-and-demand situation, according to CREA.

Nationally, there was 6.1 months worth of inventory of existing homes listed for sale, down a notch from 6.2 months in August.

The resilience in the housing market at a time of renewed global uncertainty is comforting on many levels, says Mr. Hogue.

“First of all, it speaks volumes to the continued strength of the market’s underpinnings –balance between demand and supply, positive employment trends, low interest rates. But perhaps more importantly, it says much about the confidence Canadians maintain about making a major purchase and attendant financial commitment.”

A bright spot in U.S. data

Investment by U.S. business in fixed assets and equipment took an encouraging leap in the third quarter, accompanied by a healthy increase in vehicle and aircraft shipments.

Both non-defence capital goods shipments and orders data from the monthly durable goods and factory goods reports, and the equipment component of the monthly industrial production report, rose at a surprisingly fast clip in the third quarter, says Michael Englund of Action Economics.

The positive showing occurred amid growing fears of a slowdown. There was a sharp drop, for example, in the capital spending expectations of businesses, Mr. Englund writes in a recent report.

So the good news needs to be taken with a grain of salt, he says.

“Beyond the encouraging rebound, however, it remains the case that companies continue to hoard cash in the face of uncertainty about how the massive fiscal and monetary policy imbalances will be unwound, and we continue to see this unusually heightened level of corporate and entrepreneurial fear as the primary reason why 14 per cent fixed investment growth in the third quarter isn’t double that, as it often is at this stage of the cycle.”

Corporate profits usually track business fixed investment but not in this case: Profits soared in 2010 while fixed investment was almost flat, he points out.

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