Canadian firms scale down hiring, investment intentions as economy struggles

OTTAWA – Canadian firms are turning progressively gloomier about the slow pace of the world’s economy and say they want to see signs of progress before ramping up hiring and investment, a new Bank of Canada survey suggests.

The findings of the central bank’s much-watched quarterly business outlook survey is not good news for those hoping to see a strong economic rebound in the second half of this year or in 2014 after what has been almost two years of sluggish growth.

“Weak demand and uncertainty regarding future demand continue to weigh on firms’ investment decisions and near-term capacity planning,” the bank said in its summation.

“Many firms continue to report that uncertainty is affecting investment decisions, notably by leading them to postpone projects, or to shift their focus toward initiatives that involve less risk or smaller outlays.”

The most dour finding in the sampling of 100 firms, which the bank says is representative of the economy as a whole, is that there were almost as many saying they would cut back on spending on new machinery and equipment over the next 12 months as those saying they planned to increase it — 27 per cent compared with the 34 per cent who expected to spend more.

The positive seven-point balance is the lowest in four years.

Hiring intentions fared better, with a positive balance of 30 per cent, but that too represented a relatively weak finding — five points lower than in the second-quarter results.

On the question of sales, company executives appeared more optimistic that prospects will pick up over the next 12 months, but that was largely because they saw the growth of sales deteriorate over the previous year.

As well, the bank said most anticipate any improvement on this front will be limited given low expectations for demand in the U.S. — their major export market — and stiffening competition.

The survey comes on the heels of a downward revision in the global economic outlook issued by the International Monetary Fund earlier this week. For Canada, the IMF expected growth this year to come in at a subdued 1.6 per cent.

Nor do the results take into play the current political gridlock in the United States, which has resulted in a partial government shutdown and led the country to the brink of a credit default.

The disappointing findings will likely play a role in the Bank of Canada’s fall outlook report and interest rate decision next week, as will Friday’s employment data from Statistics Canada, which found a modest 11,900 gain in jobs in September. The two-tenths drop in the unemployment rate to 6.9 per cent was mostly due to fewer Canadians looking for work.

There was some good news for the economy in the report, notably that more firms said they would face capacity issues if demand unexpectedly rose, and more said labour shortages were restricting their ability to meet demand.

That was somewhat surprising, said Bank of Montreal economist Benjamin Reitzes, given that there has been little pressure on the wage and price front.

He added that the responses, along with the drop in the unemployment rate, could suggest there is less spare capacity in the economy than previously thought.

Bottom line, Reitzes called the results “consistent with continued modest gross domestic product growth and persistent uncertainty.”

Analysts believe the central bank will keep interest rates at current super-low levels for at least another year and possibly well into 2015.