In a speech last month, Bank of Canada Governor Stephen Poloz expressed optimism that Canada's business owners are gaining confidence – something he considers a key to unlocking long-dormant business investment. But now it appears that their confidence may stem from the feeling that it can't get much worse.
The central bank's quarterly Business Outlook Survey, released Friday, shows that the balance of firms expecting their sales to improve over the next 12 month has reached its highest level since early 2012. The problem is, it's a lower bar they're now looking at clearing. That's because more firms now say their sales in the past 12 months went down than those saying they went up – a reversal from the July survey.
It's the third time in the past four surveys the bulk of companies have complained of stagnant or declining sales, after 10 straight quarters before that of strong sales growth. The string of disappointments may not have broken their hopes for better days to come, but when it comes to putting money on that – in the form of investing in their businesses – their confidence looks shattered.
Slightly more companies say they will increase their spending on machinery and equipment in the next 12 months than those who say they'll spend less. But the difference is the smallest since the fall of 2009 – indicating a disturbing weakening in business-investment intentions.
This is particularly problematic for the Bank of Canada. It has been saying for months that a rebound in business investment is a key to the next stage in the economic recovery. But this survey suggests that investing is largely on hold.
The last time investing intentions in the survey were this low, tight credit conditions were a big factor. Business owners had trouble getting financial-crisis-bruised banks to lend them the money they needed to grow.
That may still be the case at the small end of the corporate spectrum (as a couple of small-business owners who contacted me this week, in response to my piece on the Bank of Montreal's small-business survey, were quick to suggest). But the Bank of Canada's survey, which canvasses about 100 firms across the full range of sizes and industries, doesn't bear this out. While these businesses have reported no improvement in credit conditions this year, most of them characterize credit as relatively easy to access. And the Bank of Canada's survey of senior loan officers at financial institutions (also released Friday) indicates that the banks have eased lending conditions to businesses this year.
The bigger problem now is the erosion in sales. Not only are companies uncertain whether their markets are strong enough to justify expansion, but they aren't seeing the money coming in to pay for it – and they can't be sure when they will.
Nevertheless, a lot of companies may not be able to resist investing in their businesses much longer. More than half of businesses in the survey now say they would have some difficulty meeting an increase in demand – the highest level since the end of 2007. And 31 per cent report labour shortages – the second-highest reading since the recession. These measures suggest that the next leg up in demand will push companies over that tipping point where they will have little choice but to spend.
That's what Mr. Poloz is counting on. But given the disappointing lack of demand in the past quarter, we have to wonder if that next leg is further away than businesses, and the central bank, had hoped.