The central bank’s quarterly survey of about 100 firms, conducted between late May and mid-June, reveals that the balances of opinion on both future sales and employment have turned positive following two quarters in negative territory.

The percentage of firms expecting to see sales volume grow at a faster pace in the next 12 months surged to 61% from 30% in the spring. In addition, the proportion of firms expecting to hire new staff in the next year rose to 39% from 25% last quarter.

“After two surveys that showed a quite negative outlook for future sales, firms expect sales growth to gradually pick up over the next year,” the Bank of Canada’s report says. “The results of the summer survey indicate that businesses foresee an improvement in the economic outlook.”

But the results also show that current growth remains weak. When asked whether the sales volume in the past year had grown at a faster or slower pace than the previous year, 69% reported slower growth, up from 48% in the spring survey. Only 17% of firms said sales were growing at a faster pace.

Credit conditions have improved, according to the Business Outlook Survey. More than 20% of respondents said that credit conditions have eased in the past three months, compared to just 8% who reported the same in the spring survey. One-third of firms said credit conditions have tightened, down from 44% last quarter.

“The [Business Outlook Survey] showed that businesses continue to perceive net tight credit conditions, although not nearly as severely as before,” commented Michael Gregory, economist at BMO Capital Markets. He noted that the reading on credit conditions marked the most favourable level since the credit crisis began in the third quarter of 2007.

Intentions for investment in machinery and equipment remains weak, with just 27% of firms expecting to increase their spending in the next 12 months, compared to 39% of firms expecting to reduce spending.

Most firms continue to expect slower growth in input prices over the next 12 months, believing that weak economic conditions will deter suppliers from increasing prices. But some firms believe commodity prices have bottomed out in the pasts few months and are likely to rise in the next year. Nearly one-third of firms expect higher input prices ahead.

Many firms also expect output prices to grow at a slower pace in the next 12 months. Just 29% of respondents said they expect prices to rise at a faster pace.

The vast majority of firms now expect total CPI inflation to be within the bank’s target range of 1% to 3% for the next two years.

The percentage of firms reporting labour shortages remains low at 17%, but rose slightly from 13% in the spring survey.

Overall, the survey results point to “improving economic conditions,” according to Paul Ferley, assistant chief economist at RBC Economics Research. But he does not expect the improving sentiment to impact the Bank of Canada’s plans to keep interest rates at low levels for another year.

“Credit has gotten tighter,” said Ferley. “This continuing downside risk to growth that this presents will likely result in interest rates being maintained at current very stimulative levels through the middle of next year.”

Gregory at BMO Capital Markets agreed that the central bank is unlikely to alter its plan.

“These survey results highlight that the worst is over for Canadian businesses, but an expected sluggish recovery will act as a constraint on [capital expenditures] and pricing power,” Gregory said. “There is little here to steer the Bank of Canada away from sticking to its commitment.”

IE