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Canadian executives confident, but cautious

Canadian businesses are still confident, but are girding for a period of tepid growth amid worrisome signs from abroad.

They have seen sales improve after the recession, and still plan to invest and hire. But, a Bank of Canada survey shows, they are concerned about market uncertainty and global developments.

"Businesses are generally positive about their near-term sales prospects, although they are concerned about recent global economic and financial uncertainties and possible spillover effects in Canada," the central bank said Monday in releasing its Business Outlook Survey.

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The survey found that for the first time since the economic downturn began in 2008, Canadian companies in the second quarter said their sales had improved over the past year.

On balance, companies plan to invest, but at a more moderate pace, and hiring plans are just about the same as in the previous survey. Some companiesthat got a V-shaped bounce out of the recession predict sales will slow to a more sustainable clip and others nervously watch for a possible backslide in the U.S. or Europe.

Along with sales prospects, investment plans moderated from the previous survey and their hiring intentions were roughly the same. But the share of companies that would have trouble meeting a surprise jump in demand climbed, by nine percentage points, indicating slack in the economy is being chewed up more quickly, and suggesting the central bank will need to raise interest rates next week and possibly at future decisions to keep inflation in check.


While always crucial for giving Governor Mark Carney and his rate-setting panel a direct feel for what's happening in the economy, the survey is particularly important this time around because it was taken during the height of the European debt crisis and as the U.S. rebound started to look more fragile.

Policy makers are deciding whether to raise interest rates for a second-straight time on July 20, from the current 0.50 per cent level, and are crafting a comprehensive economic forecast that they will publish two days later.

Mr. Carney has been saying since April that domestic growth would slow from its breathtaking first-quarter annualized pace of 6.1 per cent, as the housing market cools and the effect of government stimulus spending winds down, and analysts say year-over-year growth in companies' earnings during the second quarter was likely much slower than in the previous three-month period.

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Nonetheless, the central bank is almost certain to lift borrowing costs next week and possibly at one or more meetings between now and the end of the year, economists said.

"Slowdowns are very common in the early stages of recovery, so I think businesses are prepared for that," Michael Gregory, a senior economist with BMO Capital Markets, said in an interview. "Fundamentally, I think there's a realization that the domestic economy is pretty solid and everything is quite manageable.''

Companies in the survey indicated that they expect both input prices (such as the cost of raw materials and commodities used in making finished products) and output prices (what they charge for what they sell) to rise more quickly than not over the next year.

A separate survey of lenders, also released by the central bank Monday, found that credit conditions had eased for a third straight quarter. Lending conditions for corporate borrowers eased for a fourth consecutive time, while small businesses and commercial borrowers saw "a modest net easing" for the first time since conditions tightened up across funding markets in the second half of 2007, the bank said.

That's a far cry from the situation south of the border, where U.S. Federal Reserve Chairman Ben Bernanke told a conference in Washington Monday that even ``creditworthy" small businesses with decent cash flows are having trouble getting loans. Such loans are ``crucial" to the U.S. recovery, Mr. Bernanke said, according to Bloomberg News.

Even Canadian companies that were well-positioned to ride out the recession and who have managed to climb back to pre-downturn output levels aren't expanding or investing the way they used to.

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Jonathon Fischer, chief executive officer of Mold-Masters Ltd., a tooling manufacturer in Georgetown, Ont., said in an interview that he's being more cautious about big capital investments, using an aggressive forecasting system to track weekly orders and assess whether longer-term, expensive purchases can be justified.

"In the past we probably would have spent much more easily," he said. "Today, we're being, I don't want to say frugal, but we're being much more intelligent.''


Executive sounding

53: Percentage of senior managers of Canadian companies who expect sales growth to quicken over the next year.

29: Percentage of senior managers who expect sales to slow.

38: Percentage of companies that plan to increase machinery and equipment investment over the next 12 months.

26: Percentage that expect to spend less on machinery and equipment over the next year.

50: Percentage of companies that plan to increase payrolls over next 12 months.

10: Percentage that expect to trim staff.

18: Percentage of companies that say credit conditions have loosened, compared with 8 per cent that say conditions are tighter.

Source: Bank of Canada Quarterly Business Outlook

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Economics/business writer

Jeremy has covered Canadian and international economics at The Globe and Mail since late 2009. More

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