POLITICS

Canadian firms look to better sales, more hiring, but optimism still muted

01/14/2013 10:32 EST | Updated 03/16/2013 05:12 EDT
OTTAWA - After suffering through a rough 2012, Canadian companies are hopeful of a modest turnaround this year that will allow them to hire more workers and increase investment, a new Bank of Canada quarterly survey suggests.

However, the central bank's latest business outlook survey also notes that while businesses expect 2013 to be better, their optimism is far from exuberant.

Companies are reporting fewer capacity restraints in meeting unexpected production demands and fewer labour shortages than they did three months ago.

"Responses to the winter survey provide further indications that firms have faced a period of softness in economic conditions," the central bank said Monday in summarizing the opinions of Canadian business executives.

"While some forward-looking indicators of business activity have moved up from the levels recorded in the autumn survey, many firms cited concerns about demand over the next 12 months, as well as pressures related to increased competition."

Nevertheless, CIBC economist Peter Buchanan said the results are better than what might have been expected, given that the survey of senior management at 100 firms representative of the Canadian economy was conducted in late November and early December.

That was at a time when the economy was known to have slowed to 0.6 per cent growth in the third quarter and a crisis loomed over fears of massive tax increases and spending cuts south of the border, the so-called fiscal cliff that had threatened to drive the United States back into recession.

"Overall, it's somewhat better than expected. It does suggest Canadian sentiment did not take the hit some people might have feared over the United States fiscal cliff negotiations," Buchanan said.

He added that the level of optimism, however, was not as strong as what was seen coming out of the recession a few years back.

Scotiabank economist Derek Holt said the flagging capacity pressures back the view that Canada's output gap is growing, not shrinking, and larger than the Bank of Canada believes.

The results are in line with expectations the bank will downgrade its 2.3 per cent growth forecast next week and stick with low interest rates a while longer. In a recent speech, senior deputy governor Tiff Macklem conceded the economy had not been as strong as expected.

Monday's report finds more firms than not reported that the pace of sales growth tipped into negative territory last year for the first time since early 2010, with 35 per cent saying volumes increased at a slower pace in 2012 than the previous year, as opposed to 33 per cent who said the pace picked up.

Yet looking ahead, more said sales are expected to grow at a faster pace over the next 12 months. Forty-four per cent said they expected a pickup this year, as opposed to 28 per cent who felt sales growth would slow, a stronger reading than three months ago.

As well, 42 per cent of respondents said they expected to add employees in the next year, compared with 14 per cent who thought it would be lower. That was marginally better, on balance, than in the previous survey.

There was also a big jump in the outlook for investment in new machinery and equipment to boost productivity. The survey found 43 per cent of respondents expected spending in this area to increase, while 23 per cent expected it to fall. That compared with a 37-29 split in the previous report.

Still, the bank says the survey results don't constitute a high level of optimism among Canadian business executives and that on some questions, firms continue to report weak and even deteriorating conditions.

Even on the matter of improved sales expectations, the bank said firms attribute the optimism to "pursuing new business opportunities or by adopting strategies to maintain market share," rather than to increased demand.

"Overall, uncertainty continued to temper expectations for business activity," the bank said.

A separate survey of senior loan officers found virtually no change in business lending conditions, although firms themselves reported a modest easing of credit conditions in the past three months.