June 29, 2018 / 3:00 PM / in 2 years

UPDATE 1-Business optimism near record in Bank of Canada Q2 survey

(Adds detail from the report)

By Andrea Hopkins

OTTAWA, June 29 (Reuters) - Canadian business optimism rose to near record-levels in the second quarter, with companies reporting rising pressure on capacity and prices, though investment intentions and expectations for future sales ebbed, the Bank of Canada said on Friday.

Citing a survey that was largely conducted before Canada-U.S. trade relations were hit by the imposition of metals tariffs, the bank said inflation expectations picked up and labor shortages are becoming increasingly common.

While the quarterly survey’s measure of sales growth over the past 12 months rose to its highest since 2012, expectations for future sales growth receded but remained marginally positive, indicating companies expect little change in the pace of sales growth in the year to come.

“The indicator of capacity pressures moved back up, with the number of firms citing significant difficulties meeting an unanticipated increase in demand reaching levels not seen since before the 2008-09 recession,” the bank said in the report.

While the survey showed widespread optimism, almost all of the interviews of about 100 executives were conducted before U.S.-Canada trade relations deteriorated sharply with the U.S. announcement of steel and aluminum tariffs on Canada on May 31 and subsequent rhetorical attacks by U.S. President Donald Trump.

The closely watched Business Outlook Survey showed widespread plans among firms to boost their workforces over the next 12 months, particularly in the service sector, with reports of labor shortages most prevalent in British Columbia and central Canada. It said some firms with binding shortages expect to raise wages in response.

“For the fifth consecutive quarter, firms reported that, on balance, labor shortages are more intense than they were 12 months ago,” the report said.

Some businesses, particularly those in British Columbia and Quebec, said strong demand will allow them to pass on higher input costs to their customers.

While inflation expectations moved up again, they remained within the bank’s 1-to-3 percent target range. A majority of firms expect consumer price index inflation to be in the upper half of the range over the next two years amid rising oil prices and labor costs, the report said.

Fewer firms than in the spring survey plan to increase investment in machinery and equipment, “but intentions remain buoyant,” with higher investment plans more prevalent in the services sector, it said.

“Businesses frequently reported that the regulatory environment is negatively affecting their investment plans,” the report said. (Reporting by Andrea Hopkins and Dale Smith; Editing by Bernadette Baum)

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