The boomlet of good economic news continues.
A lot of the indicators that make headlines say more about the past than the future. An exception is the Bank of Canada’s quarterly Business Outlook Survey. The central bank seeks to measure confidence by asking a group of 100 companies about things such as their hiring and investment plans for the 12 months ahead. The latest survey, released January 9, suggests Canada’s companies are feeling okay about 2017, which is a significant improvement from the previous couple of years.
The Bank of Canada likes what it sees in the latest batch of responses. “Forward-looking measures of business activity have improved as domestic sales growth gains momentum,” the central bank writes. Also, “both investment and employment intentions recovered and are more broad-based, driven by stronger demand and, in some cases, the need to catch up following a period of anemic investments and layoffs.” Given the weight policy makers put on the Business Outlook Survey, these assessments lower the odds of an interest-rate cut. The economy probably doesn’t require one.
Key is the improvement in investment intentions. Canada has posted some of its weakest economic growth outside of a recession over the past couple of years in part because business investment sunk along with the price of oil. Energy prices have stabilized, and the oil patch might be getting a bit of its swagger back.
The Bank of Canada presents the results of its business survey as “balance of opinion,” subtracting the percentage of companies that expect less of something from the percentage that expect more. The balance of opinion for investment was 24, meaning the number of executives who intend to spend more on operations over the next 12 months is significantly higher than the number who intend to cut investment. The figure was the highest since the second quarter of 2014, when the reading also was 24. There hasn’t been a higher balance of opinion on investment since 2011. “It’s encouraging that capital spending is showing some sparks of life,” said Avery Shenfeld, chief economist at CIBC World Markets.
This could be about as good as it gets. The average balance of opinion on investment since 2001 is about 13, so Canadian companies are positively giddy by by modern standards. Another way to look at it is by concentrating on only the percentage of respondents who say they plan to boost spending on machinery and equipment. That figure was 41% at the end of 2016, compared with 42% in the third quarter. That’s about where you would expect it to be, according to the central bank’s historical data:
Of course, a return to normal levels of business engagement would be welcome after years of relying on consumers piling on debt to power the economy. The Business Outlook Survey says executives are feeling better because of stronger demand for exports and a weaker currency that is boosting their profit margins. There is little reason to fear a stronger currency. The case for lower interest rates is weaker, but most forecasters still expect the Bank of Canada will wait at least a year to raise borrowing costs. That should ensure a healthy gap between the value of the Canadian and U.S. dollars because interest rates are headed higher south of the border. Exports are trickier to forecast. Nearly all the companies in the Business Outlook Survey said they thought the U.S. economy would grow in 2017. That’s positive for Canadian exports, since the U.S. is the destination for most of them. But respondents also reported a rise in protectionism. And that was before Donald Trump even becomes president. The future should be brighter, but be wary of Trump’s threats of “big” border taxes. A Tweet from the Oval Office could crush Canadian business confidence quickly.
MORE ABOUT THE ECONOMY:
- Canada isn’t projected to run a balanced budget until at least 2050
- Why Donald Trump could herald a boom for Canada—at least in the short term
- How higher interest rates could make Ontario’s debt problems even worse
- B.C. is desperate to keep its housing bubble aloft. It won’t work
- Real estate pros see risks and opportunities in B.C.’s no-interest loan scheme
- Wall Street might have been a safer place if it had been “Lehman Sisters”
- The U.S. Fed’s interest rate hike is a message: inflation is back
- Prepare for a gap to open between Canadian and U.S. interest rates