Business confidence takes hold

Share

Canadian companies continue to express confidence that the economic recovery is taking hold, and are preparing to raise prices to offset higher costs and reflect stronger demand, according to a quarterly Bank of Canada survey.

The central bank's Business Outlook Survey, released Monday, found that while 54 per cent of executives expect inflation between 1 and 2 per cent a year over the next two years, 40 per cent see price growth averaging between 2 per cent - the bank's target rate - and 3 per cent over that period, twice as large a share as in the previous survey.

The survey indicated firms expect both input and output prices to rise more quickly. In the case of output prices - what companies charge for the products they sell - the "balance of opinion" between the 45 per cent of executives predicting faster price gains than in the past year and the 17 per cent who predicted slower increases was the biggest since the central bank started asking that question in 1998.

The results reinforce reports in recent months indicating inflation and economic growth are both running hotter than the central bank anticipated in its last quarterly forecast, which it will update on April 22. Those data, combined with the fact January to March was the strongest quarter for Canadian job growth in two years, have some economists saying Bank of Canada Governor Mark Carney will raise interest rates from the current rock-bottom levels as soon as early June.

Cat:e528746c-3414-401a-b14b-50247e3bdf01Forum:2d13dc33-9921-4d4a-815f-e809277631e4

Mr. Carney pledged last April to keep the benchmark rate at 0.25 per cent through the end of June, depending on the outlook for inflation. He is widely expected to use an April 20 rate decision and the forecast two days later to hint at how soon and how aggressively he plans to tighten borrowing costs.

Still, the survey found the percentage of firms that would have trouble meeting a surprise jump in demand was little changed from the previous quarter, at 30 compared with 29, remaining low enough to indicate "subdued capacity pressures" in the economy.

Bank of Montreal deputy chief economist Doug Porter said that while "the inflation outlook is slowly creeping higher," an "overhang of price-dampening slack" in the economy should keep prices from getting out of control.

The business poll, based on about 100 interviews conducted across the country between Feb. 22 and March 18, found senior managers' predictions for future sales dipped from the near-record optimism of the fourth quarter but remained high, and firms continued to report plans for higher spending on machinery and equipment and increased hiring.

"On balance, firms expect sales growth to pick up over the next 12 months, and plan to increase investment spending and employment," the central bank said. "Investment plans are increasingly being targeted at expansion and improving efficiency to promote future growth."

Companies' access to credit was "essentially unchanged" during the first quarter after the easing they experienced in the final three months of 2009, the bank said. The survey found that getting credit remains easier for larger businesses and, "over all, many firms noted that access to credit remains more restrictive than it was prior to the intensification of the financial crisis in September, 2008."

A separate survey of financial institutions showed lending conditions eased for corporate borrowers for the third straight three-month period, the central bank said, and started to stabilize for small businesses and commercial borrowers after several quarters of tightening.

Over all, 15 per cent of executives in the business outlook survey had seen some easing of credit conditions over the past three months while 14 per cent saw tightening.

The accompanying poll of senior loan officers, which measures a balance of opinion by subtracting the weighted percentage reporting easier credit conditions from the weighted percentage of those reporting tighter credit conditions, found a negative balance - indicating more willingness to lend - for the second straight quarter. That figure entered negative territory between October and December for the first time since 2007.