Feature article
Canadian CEOs are Remarkably Upbeat
by Sherry Cooper, Chief Economist, BMO Financial Group
July 12, 2011
In a world bedeviled by sovereign debt crises, jobless recoveries and enormous political uncertainty, Canada is a bulwark of stability and confidence. To be sure, as a small open economy, Canada is inevitably impacted by the problems in the rest of the world, but judging from recently available data, Canadian businesses continue to hire, invest in technology and look forward to continued growth.
While the U.S. employment data for June were dismally weak for both the private and the public sectors, job growth continued to surprise on the high side in Canada. In deep contrast to the U.S., Canadian housing activity remains quite strong as housing starts climb significantly, sales remain strong and prices continue to rise.
A recent Business Outlook Survey conducted by the Bank of Canada's regional offices showed consistent and surprising improvement in business sentiment. Firms reported a pick up in sales growth over the past year and an expectation that the pace of expansion will pick up. Sentiment is particularly buoyant in Western Canada, where demand for commodities and related products has been strong, while firms in other regions generally expect growth to continue, but at a stable pace. Most expect the continued backdrop of a soft U.S. economic activity, a strong Canadian dollar and sizable competitive pressure. Some are reporting positive results in diversifying their businesses and repositioning their strategies.
Businesses are also reporting plans to increase employment and investment across most regions and sectors. Plans to increase spending on machinery and equipment are welcome news as Canadian firms expect to increase production and improve productivity. On the employment front, the proportion of firms expecting to increase hiring over the next year is at a record high, especially in the service sector, although expected job gains were reported across the country and across sectors.
Capacity utilization pressures have moved up as a growing number of businesses report that they would have difficulty meeting unexpected increases in demand, especially in Central and Eastern Canada. This sentiment has been evident in Western Canada for some time. More firms are reporting difficulty in finding qualified workers, although that group remains a much smaller proportion of the total than during the boom years from 2001 through early 2008. This information no doubt feeds into the Bank of Canada's assessment of the size of the output gap, which might well be smaller than estimated just a few months ago.
On the bright side, inflation pressures remain relatively muted, despite the rise in energy and food prices earlier this year. Firms expect input prices to continue to rise, although fewer see output prices rising, noting that competitive pressures limit their ability to pass on increase costs to their customers.
Businesses across regions and sectors also report that credit conditions have eased over the past three months. This was confirmed by the Bank's Senior Loan Officer Survey, which showed a strong consensus that both price and non-price lending conditions have eased for corporate, commercial and (for the past three quarters) for small businesses as well. Business respondents attributed the improved credit environment to heightened competition among lenders, as well as an improved economic outlook and better industry-specific conditions. Credit demand was seen to have picked up, especially for small business.
Bottom Line: Canadian business confidence is relatively strong despite the strong Canadian dollar and the continued soft spot in the U.S. economy, not to mention the European debt crisis and fiscal tightening in Canada. The fundamentals are strong in Canada and will continue to drive a rebound in growth in the second half. With relatively low unemployment and substantial household wealth, consumers are also feeling confident. We expect the expansion to continue through next year (at least) with growth running around a trend level of 2½-to-3 percent, the jobless rate edging downward and the inflation rate remaining within the Bank of Canada's target band.
