OTTAWA (Reuters) - Canadian businesses saw less pressure on production capacity in the fourth quarter and were concerned about demand over the next year, according to a Bank of Canada survey released on Monday that provided more reasons for the bank to delay an interest rate increase.
Still, in the central bank’s winter business outlook survey, conducted in November and December, companies were more upbeat about sales and investments than they were in the previous quarter’s survey, even though fears about the U.S. fiscal cliff were intensifying when the fourth-quarter survey was taken.
They attributed the more optimistic outlook to new strategies they were adopting to remain competitive in a challenging environment rather than to a strong economy or expansion plans, the bank said.
“Overall, uncertainty continued to temper expectations for business activity,” the bank said in a summary of the survey’s findings.
Canada long ago rebounded from a 2008-09 recession and recovered all the jobs lost during the downturn. The economic expansion hit a bump in the second half of last year.
Signs of greater slack in the economy along with tame inflation suggest the Bank of Canada will be in no rush to raise its benchmark interest rate, currently at 1.0 percent, even though it has been signaling intentions to raise the rate for several months.
Market players unanimously expect it to keep the rate on hold on its next decision date on January 23. They forecast the next rate move will come either later this year or in 2014.
The bank said “considerably fewer” companies reported they would have difficulty meeting a sudden increase in demand, with the portion reporting “some” or “significant” difficulty dropping to 34 percent in the fourth quarter from 47 percent in the third.
Only a quarter of those surveyed reported labor shortages, down from 33 percent in the previous survey.
“Better growth and unchanged hiring expectations are positive, but the key here is that fewer firms are flagging capacity pressures which backs up our view that Canada’s output gap is growing, not shrinking, and is larger than the BoC has been projecting,” Derek Holt and Dov Zigler, economists at Scotia Capital, said in a note to clients.
The vast majority of companies expected Canada’s inflation rate to stay well within the Bank of Canada’s target range of between 1 to 3 percent, with over half expecting it to stay at the lower end of that range.
Companies linked to the oil patch or other commodities were generally more comfortable in their sales outlook than those in the hard-hit manufacturing sector, according to the poll. Manufacturers reported higher-than-desired inventories and many said they were pursuing new opportunities or adopting strategies to maintain market share.
As for plans to boost investments in machinery and investment, the focus was not on new projects but on “ways to use existing capital more intensively or to become more competitive,” the bank said.
Editing by Andrew Hay