The sharp slide in the loonie is boosting foreign sales among Canadian companies, but also stoking fears of higher costs.
For the first time since its summer 2013 survey, more businesses reported accelerating rather than slowing sales growth in the previous 12 months, the Bank of Canada said Monday in its latest quarterly business outlook survey.
Businesses are crediting the lower dollar and the improving U.S. economy for the brighter growth prospects.
Bruce Catoen, chief technology officer at Georgetown, Ont.-based Mold-Masters Ltd., a maker of specialized injection-moulding equipment for the plastics industry, acknowledged that the higher costs of imported equipment can dent profits. But he said it's more than offset by gains from the lower dollar, particularly when a manufacturer adds significant value to the final product.
"Because our import content is relatively small, the net impact [of a lower dollar] is very positive for us," he said.
Orders from Canadian and foreign buyers have "generally improved," according to the survey. Hiring and capital spending intentions are also up compared with January, when the last survey was done.
The survey is another clue that the long-awaited export recovery may finally be taking root in Canada, with a little help from the cheaper currency and the U.S. recovery.
"The increasing optimism of Canadian businesses is a good sign of where the Canadian economy will be heading over the next year," economist Connor McDonald of Toronto-Dominion Bank said.
The economy grew 0.5 per cent in January as it bounced back from the effects of bad weather in December. But most economists are still forecasting annualized growth of less than 2 per cent in the first quarter as a whole, or well below the Bank of Canada's 2.5-per-cent projection.
The survey found a "widespread view" that the lower Canadian dollar would put upward pressure on the cost of goods companies purchase. The dollar has fallen more than 10 per cent versus the U.S. dollar in the past year.
But companies say competition is so far limiting their ability to pass along those costs. The result is that overall inflation expectations remain low and clustered at the bottom end of the bank's 1-to-3-per-cent inflation target range, the bank said.
The survey is based on interviews with senior managers at 100 companies, chosen to reflect the makeup of the Canadian economy, and conducted between Feb. 18 and March 13.
Respondents also reported a "slight easing" of credit conditions. That was borne out in a separate survey of senior loan officers at major Canadian financial institutions, who reported lower interest rates and other credit conditions.
Among other key findings:
- A majority of respondents – 51 per cent – expect their sales to increase at a faster rate over the next year versus 24 per cent who expect sales growth to slow and 26 per cent calling for no change.
- The balance of opinion on investment in machinery and equipment remains positive (46 per cent higher versus 25 per cent lower). Spending intentions among manufacturers have improved since January.
- 53 per cent of companies expect to hire more workers over the next 12 months, compared with 8 per cent who expect to shrink their work forces.
- 45 per cent of companies report they would face some or significant difficulty meeting unexpected increases in demand, up slightly from the January, 2014, survey.
- Just 23 per cent of companies reported labour shortages – a third-straight quarterly decline.
- 47 per cent of respondents expect higher input prices, up sharply from previous surveys.
Also Monday, the central bank announced it has hired accountant and long-time federal bureaucrat Filipe Dinis as its first chief operating officer. Mr. Dinis will take on many of the administrative functions now done by senior deputy Governor Tiff Macklem, who is leaving in June to head the University of Toronto's Rotman business school. The bank hasn't named Mr. Macklem's replacement yet.
With files from Richard Blackwell in Toronto