Canadian firms have become more pessimistic about the economy and plan to ratchet down investment spending while keeping hiring modest, the newest business outlook survey by the Bank of Canada suggests.
The spring sampling of 100 firms, considered representative of the Canadian economy, continues a recent trend with muted to sour prospects for sales, hiring and investments.
“Taken together, responses of the spring survey indicate that, following a recent slowing in economic activity, firms expect business conditions to remain challenging over the next 12 months,” the central bank said Monday in its analysis of the results.
“The balance of opinion on investment is positive but has declined, and hiring intentions are little changed. Firms indicated that uncertainty continues to weigh on their plans and decisions.”
The results are not surprising given that the Canadian economy has struggled to maintain forward momentum for the better part of the past year. The last six months of 2012 produced an average growth rate of about 0.7%, the worst since the 2008-09 recession, and the first three months of 2013 has seen employment fall by about 26,000 jobs overall.
The biggest decline from the previous survey was on the question of past sales growth. Almost half the respondents said their sales growth was worse last year than the year before, while only 31% said it was greater. In the winter survey, the responses were almost equal in terms of positive and negative.
As well, investment intentions have fallen. The result finds 39% of firms planning to increase spending on new machinery and equipment over the next 12 months, but 27% say they will spend less — a positive balance of opinion of 12. That is the second lowest balance of opinion since 2009, and down from the plus-20 balance of opinion result in the winter survey.
The investment intentions result could represent a serious blow to the economy because corporate spending, along with exports, are two key areas the Bank of Canada expects to support growth this year. Recent indicators have shown that exports have not rebounded as the central bank had hoped, however, and now investment may also underperform.
Other elements of the survey are more positive, although far from strong.
On the question of future sales volumes, firms were slightly more optimistic of a pickup than they were in the previous survey but that is coming off a poor 2012.
Hiring intentions were more positive, with 45% of respondents saying they intend to hire more employees over the next 12 months, while only 13% said they plan to cut workers. The plus-32 balance of opinion is slightly better than the plus-28 found in the previous survey.
Analysts said the findings could have been worse and are positive enough to support the central bank’s current stand-pat position on interest rates, which many economists say indicates the benchmark will remain at one per cent until 2014.
“It could have been better and it could have been much worse, but in the end, weaker sentiment on machinery and equipment investment for the next 12 months challenges the Bank of Canada’s assumption of an acceleration (in economic growth),” said Jimmy Jean of Desjardins Capital Markets.
“The first quarter could easily disappoint on that front, judging from the (weak) profile of volume imports for industrial machinery, a reasonable indicator for machinery and equipment spending.”
He added the Bank of Canada will likely need to revise downward its official projections for the economy this month, including the 2.3% expectation for the first quarter and two per cent annual average for 2013. The consesus is already ahead of the bank on the latter number, judging growth to be limited to 1.6%.
Other results in the survey also pointed to soft conditions.
Fewer firms reported labour shortages, an indication of a loose labour market.
Skills development to counter specific labour shortages was a key plank of the federal budget in March but, if there is a disconnect between the training Canadians receive and the jobs needing to be filled, it’s hard to find in this survey.
“The percentage of firms reporting that labour shortages are currently restricting their ability to meet demand declined for the second consecutive survey and is below the survey average,” the bank said.
As well, firms said they don’t believe prices will rise very much in the near future, nor do they believe their input costs will increase significantly, two further signs of modest economic growth.
And the bank said some smaller firms reported more difficulty obtaining credit, although a separate survey of loan offices actually suggests lending conditions have eased slightly during the first quarter of 2013.