Firms face mounting capacity, credit pressures

Mon Jan 14, 2008 2:57pm EST
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OTTAWA (Reuters) - The portion of Canadian companies with difficulty meeting increased demand rose to a new high in the fourth quarter of 2007, despite slower economic growth and a lower inflation outlook, a Bank of Canada survey showed on Monday.

In its fourth-quarter Business Outlook Survey, the bank found that 60 percent of firms reported "some difficulty" or "significant difficulty" in meeting an unexpected increase in demand, up from 54 percent in the third quarter.

Most of the pressure came from the services sector and in Western Canada, the bank said in its report.

"Labor continues to be the most commonly reported constraint in production capacity," it said.

The results of the survey suggest that while the central bank has room to cut interest rates, it may be cautious not to lower borrowing costs too aggressively.

Economic growth in Canada slowed to 2.9 percent in the third quarter from 3.8 percent in the second quarter. Economists expect 2.3 percent growth in the fourth-quarter as the weaker U.S. market hampers exports.

The Bank of Canada pays particularly close attention to the survey results on capacity constraints, which can fuel inflation.

It is widely expected to lower its key overnight interest rate on January 22 for the second time since December as the U.S. housing crisis, a strong Canadian dollar and tight credit dampen growth prospects.

But the bank is likely to tread carefully when pondering additional cuts because of signs that economic activity continues to expand at a rate that could trigger higher inflation.   Continued...