Investing Daily Article of the Week
by Ari Charney, Investing Daily
Despite an unusually harsh winter, the Canadian economy has been performing far stronger than expected during the first quarter. And that appears to have translated into upbeat sentiment among the executives running Canada’s largest firms.
Each quarter, the Bank of Canada (BOC) interviews the senior management teams of about 100 firms that are considered most representative of the composition of Canada’s gross domestic product (GDP). The spring 2014 survey was conducted from Feb. 18 to March 13. The results of these meetings are summarized in the central bank’s latest Business Outlook Survey.
The broad findings were that the effect of a lower exchange rate coupled with firms’ growth initiatives have bolstered expectations of better growth ahead.
In particular, businesses have noted an improvement in recent sales activity and anticipate further growth in sales over the next 12 months. Export-oriented firms expect sales to gradually strengthen, while firms that are more dependent on the domestic economy are optimistic about their efforts to enter new markets or develop new products.
For the trailing 12-month period, 44 percent of firms reported that sales volumes had grown at a greater rate than during the previous period. That result was an improvement of 10 percentage points from what companies said during the winter survey.
Equally important, 51 percent of firms expect even stronger sales in the year ahead. That’s essentially the same figure that was reported in the last survey, though at least now there’s greater evidence of rising sales to support such optimism.
Plans to increase investment in machinery and equipment (M&E) are similar to those in the winter survey, but have improved somewhat among manufacturers, which offset declines in other sectors.
Over the next 12 months, 46 percent of the firms surveyed expect to spend more on M&E than they did during the prior period, while 30 percent of firms say they’ll spend about the same. That’s an improvement of 4 percentage points for the former, while the latter figure declined by the same amount.
Canada’s manufacturing sector was hit hard during the downturn, particularly exporters, so the fact that companies are starting to invest for growth again is reassuring. The bank says intentions to increase M&E investment are somewhat more prominent among small- and medium-sized firms and among export-oriented firms.
Hiring plans are also positive, with 53 percent of firms surveyed anticipating higher levels of employment over the next 12 months, which was consistent with what was reported in the winter survey.
Although more firms indicated that they’re operating close to capacity, the economy still has plenty of excess capacity. The percentage of firms reporting that they would experience “some difficulty” meeting an unexpected increase in demand rose 5 percentage points, to 39 percent. And firms that said a sudden jump in demand would pose a “significant difficulty” ticked up 1 percentage point, to 6 percent.
While the BOC hopes the depreciation of the Canadian dollar will help support a resurgence among exporters, there is some concern that this could hurt companies’ bottom lines in the near term.
Firms say they’re already paying higher prices for necessary inputs, particularly for imports, though also among some materials from domestic sources. Indeed, 47 percent of firms expect input prices will rise at a greater rate over the next 12 months, a sharp increase of 18 percentage points from the winter survey.
At the same time, competition has kept a lid on how much of this inflation can be passed along to customers. While 37 percent of companies expect to charge higher prices for their products in the coming year, that’s up by just 8 percentage points from the winter survey. Of course, this situation can only persist for so long, and prices will eventually have to rise accordingly.
For now, most businesses expect inflation will remain within the central bank’s 1 percent to 3 percent target range. While the vast majority of respondents still expect inflation to remain concentrated toward the lower end of that range, there was a slight improvement in these numbers, which suggests the BoC’s fears about Canada’s persistent disinflation could soon be put to rest.
Overall, with survey results showing the strongest intentions for investment and hiring in nearly two years, Canada’s rebound appears likely to continue apace.