UPDATE 1-Bank of Canada survey shows firms still weighed by cheaper oil

Fri Apr 1, 2016 10:43am EDT
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(Adds details on sales outlook, credit conditions, background)

OTTAWA, April 1 (Reuters) - Although Canadian business sentiment improved in the first quarter, it remained subdued overall as the positive effects from foreign demand were offset by the drag of cheaper oil prices, the Bank of Canada said on Friday.

There continued to be a sharp divergence of perspectives between companies tied to the commodity sector and those that benefit from exporting abroad, the central bank's quarterly Business Outlook Survey found.

The overall balance of opinion on investment in machinery and equipment pointed to modest increases in the next 12 months. But firms tied to the energy sector and affected regions planned to curtail investment spending, while companies exposed to foreign markets intended to increase investment.

Employment intentions improved from the previous survey's six-year low but remained below the historical average. The survey reported more widespread hiring plans among non-commodity exporters and companies in the service industries.

Sales volumes on the whole were expected to accelerate over the next year but that positive balance of opinion was unchanged from the previous two surveys. Although the results suggested the pain from cheaper oil was starting to level off, some firms expected declines in their future sales volumes.

Still, more than half of the firms said that demand from the United States was lifting their sales outlook, with some companies refocusing their efforts south of the border in light of the depreciation of the Canadian dollar.

Businesses said credit conditions had tightened over the past three months, with firms seeing an increase in borrowing costs and a deterioration in their ability to issue new debt.

The reports of tighter conditions were concentrated among firms with exposure to the energy sector, either directly or indirectly. A separate survey of senior loan officers also found that overall business lending conditions had continued to tighten slightly in the first quarter.

The central bank cut interest rates twice last year to combat the shock of the drop in oil prices. The economy was in a brief recession last year but appears to have started 2016 on stronger footing. The bank is widely expected to keep rates steady when it meets later this month. (Reporting by Leah Schnurr and David Ljunggren; Editing by Phil Berlowitz)