Bank of Canada survey finds corporate optimism

Canadian firms are signalling they intend to boost hiring in the next year and increase investments to become more competitive, a Bank of Canada survey suggests.

The latest quarterly business outlook reveals some moderation in optimism and a developing divide between commodity-based firms and others.

But overall, the results are a moderately positive indicator for the economy, the bank said.

"As the recovery advances, firms continue to report higher sales growth," the bank analysis states. "On balance, businesses expect sales to increase at a greater rate over the next 12 months, driven by firms in the services sector."

Employment intentions were especially strong, with 49 per cent of firms surveyed saying they plan to increase hiring in the coming year, as opposed to only eight per cent who said they will likely slow the pace of hiring.

Hiring intentions have been at a similarly high level in four of the past five surveys, but they have not always materialized in robust employment growth.

After a strong first half of 2010, employment in Canada slowed to a crawl in the second part of the year. The 22,000 jobs gain for December, reported Friday, constituted to the strongest month since June.

'Their intentions for hiring and capital spending look fairly healthy.' —CIBC economist Avery Shenfeld

Other key indicators in the survey also pointed to positive, if moderate, growth.

More firms than not expect the pace of sales to pick up in the coming year and plan to invest more in machinery and equipment — although in both cases the balance of opinion was stronger three months ago.

CIBC chief economist Avery Shenfeld said the generally upbeat mood of business leaders is in line with brightening prospects for the economy.

"We've been hearing more positive news both on the Canadian economy and U.S. economy, so it's not surprising that businesses are more optimistic about their plans for the upcoming year," he explained.

"What is interesting is their intentions for hiring and capital spending look fairly healthy, particularly for capital spending because those are decisions they would have (made) well ahead."

The quarterly survey of 100 firms, conducted between Nov. 15 and Dec. 10, is often cited by the central bank in its decisions on interest rates.

Economists said the latest sentiments are unlikely to affect bank governor Mark Carney's rationale for the next scheduled rate decision on Jan. 18. The vast majority of analysts believe Carney will keep the key interest rate at one per cent next week.

Not all sectors were equally upbeat, and firms stressed they continue to face challenges. The survey found a divide between Canadian companies associated with the resurgent resources sector and those that are not.

"Sales expectations are generally more robust among those involved in, or benefiting from, commodity-related activity — particularly in oil and mining," the bank said.

It did not reveal the breakdown between commodity-based firms and others. Firms also reported they still face considerable headwinds from weak demand for their products and strong competition, both domestic and foreign.

Price pressure

That competition, they said, would restrict their ability to pass on price increases to their customers due to input costs they must pay because of higher-priced commodities.

Still, the main takeaway from the report is that the general trend of business sentiment is upbeat despite the headwinds, said Scotiabank economist Derek Holt.

"What is encouraging is that the survey results held up reasonably well to the further appreciation of the Canadian dollar over recent months. Despite the elevated levels of the currency, their expectations of future sales growth moderated only somewhat."

A separate survey of senior loan officers found that lending conditions continue to improve across borrower classes, from big to small businesses — a good indicator for future investment.

The bank said Canadian firms appear to be ready to invest in order to improve their productivity and take advantage of the recovery.

While lower than the record set three months ago, the favourable 29 percentage point balance opinion on investment intentions was the second highest reading in several years.

"Efforts to improve competitiveness by raising productivity or by expanding into new areas, or intentions to expand output in line with strengthening demand, feature prominently among the factors driving firms' investment intentions," the bank said.