April 14, 2008 / 3:03 PM / in 10 years

Canada companies' economic outlook sours: poll

OTTAWA (Reuters) - Canadian businesses are gloomier about the near-term future due to a slowing economy and tighter credit conditions, and are concerned about the rising costs of energy and food, a survey showed on Monday.

<p>The Toronto city skyline, normally aglow with lights from office buildings, is seen dark during Earth Hour in Toronto, March 29, 2008. REUTERS/Mark Blinch</p>

The Bank of Canada survey of companies between February 22 and March 20 supports the view that more interest rate cuts are needed to keep the economy out of recession as it gears down.

“If anything, it kind of confirms the trajectory they’re on and it does suggest the Bank of Canada will remain in an (credit) easing mode,” said Charmaine Buskas, senior economics strategist at TD Securities.

The bank has cut its overnight lending rate by one percentage point since December to 3.5 percent and the majority of primary securities dealers surveyed by Reuters expect it to shave a half-point off the rate for the second straight time next week.

The survey showed the balance of opinion on sales growth was negative for the first time since 2001, meaning the number of firms expecting sales volume to decrease is greater than the number expecting an increase.

The poll also revealed a marked decrease in the number of companies expecting labor shortages and capacity constraints, suggesting the days of frothy domestic demand and unexpectedly strong job creation may be coming to an end.

The central bank said the shift in sentiment from the fourth quarter was marginal, however.

“While the weaker U.S. economic situation is weighing more heavily on the outlook, firms are not experiencing a marked change in the pace of business activity,” the bank said in its summary of the poll findings.

“Firms negatively affected by the weaker U.S. economic situation are generally expecting sales growth to moderate, while those less exposed are more optimistic about sales prospects.”

Forty-one percent said credit conditions continued to tighten in the previous three months due a market-wide repricing of risk. This was the third straight quarter in which they reported increased difficulties in obtaining financing.

Inflation expectations remain well-anchored with over three-quarters of the respondents predicting it will stay within the Bank of Canada’s target range of 1-3 percent.

However, Canada is not immune to the high oil prices and food inflation that are raising concerns in the rest of the world. So far, the appreciation of the Canadian dollar against the U.S. dollar has shielded Canadian consumers from the price hikes seen elsewhere.

There was a sharp rise in the number of companies who expect input prices to rise faster over the next 12 months than in the previous 12 months. Citing high oil and food prices as well as rising imports from China, 42 percent saw input prices gathering momentum, versus just 26 percent in the previous quarter.

Some firms expect to pass along those price increases to consumers.

“While a rising loonie has moderated the increase in largely U.S.-dollar-denominated food and energy prices, the Canadian dollar may be hard pressed to keep pace with further increases coming in food and energy prices,” said Jeff Rubin, chief economist at CIBC World Markets.

Reporting by Louise Egan; Editing by Peter Galloway

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