Canadian firms were generally upbeat over the second quarter of the year, according to the Bank of Canada’s quarterly Business Outlook Survey (BOS). The Bank’s “BOS Indicator”, a statistical summary of the overall results of the survey, rose to 3.1 (from 1.9 previously), its highest level since 2011.
Of note, the survey was conducted between May 3rd and June 5th, a period which includes the announcement of both U.S. steel and aluminum tariffs and the commerce department investigation into U.S. auto imports, but before the heated rhetoric around the G7 summit conclusion.
The details of the report showed a few interesting divergences. The balance of opinion around future sales fell a tick, to 6% (from 16% previously), with some firms reporting capacity constraints impacting sales prospects. In contrast, ‘indicators of future sales’, which captures order books, advanced bookings, and similar metrics, rose for a second quarter to hit 49% – the fifth highest reading on record.
Investment intentions fell back for a second quarter, but remained positive with a balance of opinion of 17%. The associated commentary noted that fewer firms are planning to increase investment in machinery and equipment, but intentions were still described as ‘buoyant’. This may be a reflection of the structure of the survey, which asks for intentions relative to the prior 12 months. The solid performance of M+E over this time is a high bar to match. The interesting divergence here is that these intentions are not higher given that the share of firms reporting some or significant difficulty meeting demand is near a record high at 57%.
These challenges extend to hiring. Hiring intentions rose for a third straight quarter, with firms reporting labour shortages as a limit to hiring. Indeed, both the share of firms that reported labour shortages, and the intensity of those shortages remained elevated.
With all of these pressures at play, expectations around price growth also rose on both the input and output sides. Notably, the share of firms expecting inflation in the 2% to 3% range or above 3% rose again, with nearly 2/3 of firms falling into this category.
Senior Loan Officer Survey
The Senior Loan Officer Survey (SLOS), also released this morning, indicated an easing of lending conditions for both businesses and households. On the business side, both price and non-price conditions eased in the second quarter, but only for corporate borrowers due to increased competition from banks and capital markets. Lending conditions for small businesses and commercial borrowers remained unchanged, while their demand for credit picked up.
For households, easier lending conditions were driven by mortgage lending. Price conditions have eased substantially, as a reduced pool of eligible borrowers owing to B-20 rules and higher mortgage rates increased competition among lenders. Non-price conditions were unchanged. Demand for non-mortgage loans remained unchanged, and some easing of price conditions occurred for auto loans. Lending conditions were unchanged for other types of consumer loans.
Key Implications
Don’t count Canadian firms out just yet. Beneath a few soft spots that can probably be put down to the structure of the survey, firm sentiment looks healthy heading into the second half of the year. Order books remain solid, and all labour market indicators were robust. To be sure, developments since the survey are likely to weigh on sentiment, and comparing reported capacity constraints against investment intentions suggests that even prior to recent developments, uncertainty was tempering the pace of spending. But, for the time being, firms continue to report a constructive operating environment.
On the lending side, it is no surprise that the impact of B-20 rules and higher mortgage rates are working their way through the housing market. Growth in residential mortgage credit continued to decelerate in April, falling to 4.9% y/y (from 6.4% a year ago), a trend that is likely to continue for a while. That said, housing market activity is likely to trough in the second quarter of the year, and recover gradually thereafter. The easing of credit conditions will help this process.
The solid BOS, together with a decent April GDP report, will leave the Bank of Canada confident that its growth narrative remains intact. We may have lost a bit of our conviction following Governor Poloz’s remarks earlier this week, but given his emphasis on data dependency, we are confident in looking for a 25bp hike on July 11th. At the same time, data dependency and the significant uncertainty facing the economy mean that we are also comfortable in our expectation that July will likely mark the last rate hike for 2018.
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