By Promit Mukherjee and David Ljunggren
OTTAWA (Reuters) – Canadian businesses expect an improvement in demand and sales next year, supported largely by interest rate cuts, but are concerned about potential damage from promised U.S. policies, the Bank of Canada said on Monday.
The bank's fourth-quarter business outlook survey showed that overall business sentiment remained weak. The Bank of Canada is monitoring this survey closely because it gives a perspective on companies' investment and hiring intentions.
The Business Expectations Index – a measure of expectations under current economic conditions – improved to -1.18, its best place in the past five quarters but still below average.
Only 15 per cent of companies are now planning for a recession in Canada over the next year, down from 16 per cent in the third quarter, she said.
“After a period of weak demand, companies expect their sales growth to improve over the next year. This expectation is largely due to the recent cuts in interest rates and the expectation of further cuts in the future,” she said.
The forecast was implemented from November 7 to 27, before the bank cut 50 basis points on December 11. US President Donald Trump promised on November 25 to impose a 25% tariff on all Canadian imports when he took office.
A separate online poll of business leaders conducted by the central bank in December showed widespread uncertainty about the potential repercussions of US policies, with 40% of respondents saying they expected the effects to be negative.
The bank has cut interest rates by a total of 175 basis points since June in an attempt to stimulate the weak economy and counter rising unemployment. Interest rates had reached a two-decade high of 5% before the bank began easing policy.
“Business intentions to increase investment over the next year are more widespread and well above their historical average,” the Bank of Canada said in the survey.
But she warned that uncertainty related to US trade policy was holding companies back from investing, although the energy sector was likely to be an exception.
The companies said they expect selling prices to grow over the next 12 months, but improving demand conditions will allow them to weather cost increases and recover margins.
The survey indicated that a larger than usual share of companies plan to keep employment levels roughly constant over the next year. However, they also see no need to reduce staff.
Canada's economy added nearly four times the number of jobs expected in December and reached its highest number in nearly two years, but unemployment remains at historically high levels.
(Reuters Ottawa editorial)
