- The outlook for future sales improved with the diffusion measure jumping to 31 in Q3 from 9 in Q2.
- However, this improved outlook did not translate into businesses indicating any increase in the pace of hiring or investing.
- Q2 credit conditions from a borrower’s perspective were essentially unchanged in the quarter with most firms indicating that credit was easy or relatively easy to access.
- 97% of respondents saw inflation remaining within the Bank of Canada’s target range of 1%-3% over the next two years.
- The Senior Loan Officer Survey, reflecting credit conditions from the lender’s perspective, indicated credit conditions remained easy in the quarter.
The Bank of Canada released both its Business Outlook Survey (BOS) and its Senior Loan Officer Survey (SLOS) for Q3/13 this morning. The BOS survey indicated that though businesses are more optimistic about future sales, this confidence is not so strong as to prevent firms from becoming less aggressive in hiring and investing. Firms also reported that sales growth deteriorated over the past 12 months. With respect to the key credit conditions component, borrowers indicated unchanged credit conditions with credit easy or relatively easy to access. From a lender’s perspective, as reflected in the separate SLOS survey, credit conditions continued to ease though marginally less so relative to the previous quarter. (The BOS survey was conducted from August 26 to September 19, 2013 while the SLOS survey reflected opinions over the period September 9-13, 2013.)
The BOS survey did contain the encouraging news that the outlook for future sales over the next 12 months improved in the quarter with the diffusion measure (i.e., positive responses less negative responses) rising significantly to 31 from 9 last quarter. This reportedly reflected the view of gradually recovering US demand though this was tempered by concerns about “persistent weakness in domestic demand.” However, this more upbeat assessment was not sufficient to prompt any similar marked improvement in hiring or investment. Though more businesses expect to increase hiring than lower it, the margin narrowed to 30 from 35 last quarter. Similarly more firms intended to increase investment in machinery and equipment relative to firms indicating a cutback in spending though the gap narrowed to 7 in Q3 from 9 in Q2. This unwillingness to increase capacity resulted in a larger number of respondents indicating that “they would face ‘some’ difficulty in meeting an unexpected increase in demand” with the diffusion measure for this question rising to 48 from 40 between the third and second quarters. Confidence to increase spending on both human and physical capital may have been tempered by firms indicating that more respondents saw a decline in sales over the last 12 months than an increase with the diffusion measure dropping to -11 from +9 the previous quarter.
Input price inflation expectations suggested that, on balance, firms expected some increases though barely so with a diffusion measure of 8. This was up slightly from 2 in Q2 though remaining at low levels that have prevailed over the last two years following a reading of 35 recorded in the second quarter of 2011. Output price inflation showed somewhat greater price pressure with the diffusion measure rising to 12 from 8 in Q2. The survey suggested that “some businesses in the goods sector anticipate a firming in prices linked in part to the additional short-term costs associated with drawing more heavily on existing capacity to meet fluctuations in demand.” This relatively benign inflation outlook occurred despite respondents indicating having difficulty filling specific positions.
The survey also indicated that 97% of the respondents expected annual inflation to remain within the Bank’s target range of 1%-3% over the next two years. This compares to 92% last quarter with a slightly greater percentage seeing inflation in the lower half of the Bank of Canada’s target range.
The survey indicated no change in credit conditions between the third and second quarters with a diffusion measure in the quarter of zero. Most firms indicated that credit is easy or relatively easy to access. The separate SLOS survey indicates from a lender’s perspective that lending conditions remained easy with a diffusion measure remaining below zero at -7.3. However, this compares to an even lower reading of -12.7 in Q2.
Today’s report provided a mixed picture with respect to the outlook by Canadian businesses. It did indicate that some of the uncertainty evident in the summer survey, reflecting both pessimism about domestic demand and concern about US growth slowing, had eased slightly with the outlook for future sales rising. However, this did not translate into greater optimism with respect to hiring and investment in machinery and equipment. This provides only tepid support to the view of GDP growth strengthening in the third quarter relative to the modest 1.7% gain in Q2. As well, the outlook for the fourth quarter has been clouded by the recent political wranglings in Washington to deal with funding US government operations and raising the debt ceiling. In this environment, the Bank of Canada will be in no rush to resume raising official rates. This is likely to be conveyed in the Bank of Canada’s statement issued following the conclusion of the next policy meeting October 23.
RBC