April 8, 2013 / 2:39 PM / 4 years ago

Cloudy outlook makes Canadian companies shy of investment

4 Min Read

The Bank of Canada building is pictured in Ottawa June 1, 2010.Chris Wattie

OTTAWA (Reuters) - Canadian businesses see a challenging year ahead after surviving the weakest two quarters of growth since the 2008-09 recession, and they expect only modest sales growth, cautious investment, and tame inflation, a Bank of Canada poll showed on Monday.

The results of the survey of senior managers, taken from mid-February to mid-March, support market expectations that the central bank is under no pressure to raise interest rates.

Business investment intentions, which the Bank of Canada says are key to economic expansion, weakened at the start of this year. Companies still plan to increase investments, but economic uncertainty is making those plans less ambitious.

The balance of opinion on investment - the difference between the percentage expecting higher investment and the percentage expecting lower investment - remained positive at 12, but it was down from 20 in the fourth quarter and lower than in most other quarters since the recession ended.

"Many firms indicated that uncertainty is having some influence on their investment plans, leading them to postpone some projects; favor investment with a shorter payoff period, smaller capital outlays or less risk; or shift their investment spending toward new or different segments of demand," the bank said in a release.

A Statistics Canada survey earlier this year showed Canadian businesses hardly expect to boost their capital spending at all this year, anticipating investment in construction and machinery and equipment would rise 0.8 percent, the lowest rate since 2009.

Companies said their sales performance over the past year was the worst in three years. But the outlook for sales growth was brighter than in the fourth quarter of 2012, mainly due to new strategies to boost sales. The balance of opinion on future sales rose to 24 from 16.

Businesses almost unanimously saw inflation remaining within the central bank's target range of 1-3 percent over the next two years. But only a third saw the rate rising to the upper end of the range of 2 to 3 percent, down from 42 percent who forecast that level in the fourth quarter. Sixty-one percent expected inflation of 1 to 2 percent versus 54 percent previously.

The percentage of companies reporting labor shortages declined for the second survey in a row, although there was no change in the overall perception of pressures on production capacity or in hiring intentions.

The survey portrays an economy that is slogging along but not really gaining traction.

"Overall, not a dire result, but not particularly robust, given that in the sales question, we are comparing future growth to a tepid prior 12-month pace," said Avery Shenfeld, chief economist at CIBC World Markets.

The results change little for the Bank of Canada, which has kept its benchmark lending rate at an ultra-low 1.0 percent since September 2010.

Central bank chief Mark Carney has been signaling for the past year that he intends to hike rates.

But the weakening economy has forced him to gradually soften his hawkish tone and in March the bank said rates would stay on hold for "a period of time" before any tightening. There is no expectation of a move at the bank's next announcement date, April 17.

Forecasters in a Reuters poll predicted a rate increase in the first quarter of 2014, although traders are still pricing in a slight chance of a cut later this year, according to yields on overnight index swaps.

Editing by Peter Galloway

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