Bank of Canada says business confidence ‘tepid’ as oil shock lingers

The mood of Canadian businesses is gradually improving, but the oil-price shock continues to weigh on sales, hiring and investment.

Canada's two-track economy is evident in the Bank of Canada's latest quarterly business-outlook survey: early signs of an export-led recovery, but also persistent weakness in the regions and industries hit by the resource slump.

"Business sentiment remains tepid over all," the bank pointed out in its fall survey, released on Friday.

"The outlook remains weak for firms in the energy sector and supply chain, as well as those exposed to slowing household spending and diminished confidence in the affected regions," according to the survey of senior managers from 100 companies, conducted from Aug. 20 to Sept. 16.

Companies are equally split on whether sales accelerated or slowed in the past 12 months. Nonetheless, the survey suggests that businesses are starting to feel more confident about what lies ahead. More businesses than not expect the pace of sales to pick up and expect to invest and hire over the next year.

Forty-six per cent of those surveyed expect sales to increase at a greater rate in the next 12 months, while 30 per cent said the pace of sales would slow. In addition, 40 per cent expect to boost spending on machinery and equipment in the next year, versus 26 per cent who expect to invest less.

The fact that the overall mood has improved from surveys earlier this year suggests that "the worst is behind us" after the economy's first-half contraction, Bank of Montreal economist Benjamin Reitzes said in a research note.

A separate Toronto-Dominion Bank report, also released on Friday, warned that it could take until 2017 before business investment "makes a meaningful contribution" to economic growth in Canada.

Exports are starting to rebound in many industries, but it is taking much longer for companies to commit to new investments, TD pointed out.

The report identifies several key sectors that are likely to drive business investment in the next couple of years: transportation, warehousing, food, hotels and manufacturing.

One the reasons that investment remains relatively weak is that businesses still have a lot of unused capacity.

Capacity pressures are weaker now than they have been in six years, with less than a third of companies reporting they would have a tough time meeting increased demand, according to the Bank of Canada survey. This suggests that "economic slack has widened," the bank said.

The survey also found "persistent labour market slack." The share of companies reporting labour shortages is at its lowest level since early 2011.

The bright spot continues to be the export sector, where companies are getting a boost from a combination of the weaker Canadian dollar and the improving U.S. economy. The same factors are also giving Canadian tourist operators a lift.

But the cheaper dollar, now at about 77 cents (U.S.), is also hurting Canadian retailers and wholesalers, the Bank of Canada said.

"Many had already passed higher prices for their imported inputs through to their customers, but judge that, in the current competitive environment, raising prices further … would be detrimental to their sales," according to the survey.

Hiring plans are also modest. Forty-one per cent of respondents expect to add employees over the next year, compared with 13 per cent who said their work forces would shrink.

A "large majority" of respondents expect inflation to stay within the central bank's target band of 1 to 3 per cent over the next two years.

For the first time in nearly two years, more businesses than not are reporting tighter credit conditions.

A separate survey of bank loan officers said tighter lending conditions persist for borrowers in the oil and gas business. Over all, lending conditions were stable in the third quarter.