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Economy Business outlook ‘subdued’ in the West, other regions more positive, Bank of Canada says

It’s becoming a tale of two economies in Canada – declining fortunes in the energy-dependent West and relative optimism virtually every else, according to the Bank of Canada’s final quarterly business outlook survey of 2018.

Overall sentiment dipped slightly from the third quarter and sales expectations have flattened, but businesses remain generally positive about their prospects for investment and hiring.

The central bank reported “positive business sentiment and elevated capacity pressures in most regions,” according to the survey, released Friday.

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Also: U.S.-China trade war biggest economic threat for 2019, Poloz says

But the mood is different on the Prairies – including Alberta, Saskatchewan and Manitoba – where the central bank reported a “subdued” outlook for sales and weaker capacity pressures.

“Firms linked to western Canadian oil prices and to housing in some regions expect demand to weaken or remain subdued and sales growth to moderate,” according to the survey, which is based on interviews conducted Nov. 5-28 with executives of 100 companies that roughly represent the Canadian economy.

The bank’s composite indicator of sentiment dropped to 2.19 in the latest survey, down from 2.83 in the fall and 3.07 in the summer.

Unfortunately, the positive mood evident in previous surveys isn’t translating into higher business investment, Toronto-Dominion Bank economists Brian DePratto and Ksenia Bushmeneva said in a research note. “When the rubber hit the road, words haven't translated into action,” they pointed out.

The survey suggests Canada’s economy is “hanging in there” in spite of the problems in the oil patch, Bank of Montreal economist Benjamin Reitzes said. And that should allow Bank of Canada governor Stephen Poloz to continue hiking its key interest rate in 2019.

“Assuming the financial volatility didn’t damage the real economy too badly and conditions stabilize, it’s reasonable to look for the [Bank of Canada] to resume rate hikes next year, even if at a more cautious pace,” Mr. Reitzes said.

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The central bank has raised its key rate five times since mid-2017 – to 1.75 per cent from 0.5 per cent. Its next scheduled rate announcement is Jan. 9.

Nearly half of businesses surveyed reported higher sales in the last 12 months, but they are considerably less optimistic for the year ahead, with respondents split equally on whether sales growth will pick up or slow down in the next 12 months. Companies involved in information technology and non-residential construction were most bullish about their sales prospects.

Nearly half of companies – 46 per cent – plan to increase spending on machinery and equipment in the next 12 months. That is down slightly from the fall survey, but still solid, according to the bank. Twenty-one per cent of respondents said they would spend less.

Even on the Prairies, investment intentions have held up due to “long-term investment strategies and spending plans to implement new technology,” the bank said.

Across the country, 51 per cent of companies say they expect to add workers in the next 12 months. That is roughly the same as in the fall survey. Many companies that don’t plan to hire more workers said they would meet demand with “automation and digital tools.”

Meanwhile, 56 per cent of companies reported they are facing capacity pressures.

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Nearly 40 per cent of respondents continue to report that labour shortages are affecting their ability to meet demand. That is roughly in line with the historical average in the survey.

On inflation, more companies than not expect to face higher prices for input costs – 33 per cent versus 26 per cent. Overall, businesses expect input prices to grow at a faster clip in the next year.

Output prices are also expected to rise as companies pass on costs to their customers, including higher input costs and tariffs.

Overall lending conditions were unchanged for households but easier for businesses in the quarter, according to a separate survey of senior loan officers, also released Friday by the bank. The bank said there was some tightening of prices on conventional mortgages in Ontario, B.C. and the Prairies, along with lower demand for all types of mortgages.

Editor’s note: An earlier version of this article incorrectly identified the number of times the central bank has raised its key rate since mid-2017 as three rather than five, as well as saying the bank raised its key rate from 1 per cent, but it raised from .5 per cent.
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