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Report on Business Bank of Canada’s key gauge of business sentiment turns negative for first time in three years

The Bank of Canada’s gauge of business sentiment has turned negative for the first time in nearly three years, weighed down by the energy slump, slowing housing activity and global trade tensions.

Corporate hiring and investment intentions over the next year remain relatively strong, particularly outside Western Canada. But business optimism has taken a significant hit, according to the central bank’s first quarterly business outlook survey of 2019, released Monday.

Virtually all measures were weaker in the quarter, including sales growth, spending plans and hiring intentions, with many key readings slipping below their historical averages.

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“The main headwinds are a more uncertain outlook in the western Canadian energy sector, continued weakness in housing-related activity in some regions and tangible impacts from global trade tensions,” the bank said.

The survey’s composite indicator slipped to negative 0.64 in the first quarter, down from a positive reading of 2.31 in the final quarter of last year, according to the survey. The bank attributed this to lower demand in both Canada and in foreign markets.

The last time the survey was in negative territory was in the third quarter of 2016.

Economists said the survey results don’t come as a huge surprise given the marked slowdown in the economy since the end of last year. The findings strongly suggest the Bank of Canada will leave its key rate unchanged at its next rate announcement on April 24, and perhaps do nothing through the rest of the year.

On the other hand, the central bank has shown no indication that it is considering a rate cut, analysts said.

“The [survey] doesn’t paint the picture of an economy falling off a cliff, but rather one dealing with a meaningful soft patch,” Bank of Montreal economist Benjamin Reitzes said in a research note.

The more pessimistic business mood suggests the central bank’s next rate hike is “a lot further away than thought just a few months ago,” said Royal Bank of Canada economist Nathan Janzen.

The business survey is typically the final piece of evidence that Bank of Canada Governor Stephen Poloz and his colleagues use to make their rate decisions.

The bank has raised its key interest rate, now at 1.75 per cent, five times since mid-2017. The last of those hikes was in October, 2018. Mr. Poloz and other bank officials have said they expect the economic slowdown to be temporary and that growth will pick up again in the second half of the year.

The composite indicator combines companies’ responses to questions about investing, hiring, sales, inflation and capacity pressures.

Forty-five per cent of companies reported weaker sales growth in the past 12 months, compared with 39 per cent who experienced higher sales growth. Nonetheless, a slightly larger percentage (40 per cent) expect higher sales growth in the next year, compared with 34 per cent who expect slower sales growth.

Meanwhile, 39 per cent of respondents said they plan to boost investment, compared with 19 per cent planning to cut spending.

Nearly half of companies plan to hire more workers, but that is down from the previous survey.

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The share of companies reporting capacity pressures fell to 31 per cent – the lowest reading since 2015. There was also a sharp drop in the share of companies reporting problems finding workers.

The survey is based on interviews with executives from 100 companies, selected to roughly match the makeup of the Canadian economy. It was conducted between Feb. 19 and March 13.

A separate survey of bank loan officers, also released Monday, showed that demand for all types of household borrowing, including mortgages, declined in the first quarter owing to higher interest rates and lower housing activity.

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