There is a divide in business confidence across the country as low oil prices weigh on the outlook for some regions more than others, according to the latest reading from the Bank of Canada.
The summer edition of the central bank’s business outlook survey suggests businesses on the Prairies expect sales to slow over the next 12 months as the oil price shock spreads across other sectors.
However, the Bank of Canada says the story isn’t the same across the country.
“Similar to the past two surveys, the low commodity price environment is driving the divergence in firms’ outlook: on the one hand firms in the energy producing regions and those that are part of the energy supply chain continue to face tough market conditions,” the report said.
“On the other hand, domestic demand is strengthening in regions that are less exposed to the energy sector.”
Boosting non-energy sectors
Overall, the survey said more firms reported sales growth than sales drops over the last 12 months, but the margin shrank compared with earlier surveys. As well, the balance of opinion among companies that expect sales to grow over the next 12 months improved modestly.
The results of the survey of senior management at about 100 companies between May 15 and June 10 were released Monday, ahead of the Bank of Canada’s interest rate announcement next week.
Stronger U.S. economic growth and a lower Canadian dollar should help lift the non-energy sectors.
The central bank is widely expected to cut its expectations for growth in the second quarter following a pullback by the economy in April, however its plan for interest rates is less clear.
“With rate cut speculation heating up ahead of next week’s policy announcement, the modest improvement and the upbeat tone for Central Canada and manufacturing slightly lower the odds of a move,” BMO senior economist Benjamin Reitzes said of the outlook survey.
“Recall that governor (Stephen) Poloz pays particular attention to this type of survey and the positives coming from non-energy sectors could stay his hand for now.”
Stronger U.S. economic growth and a lower Canadian dollar should help lift the non-energy sectors.
“The bank’s confidence in improvement outside the energy sector will be key to its assessment of whether or not further easing in monetary policy will be required in the second half of 2015,” RBC economist Josh Nye wrote.
Labour shortages growing less intense
In terms of spending on machinery and equipment, the central bank survey points to a moderate increase in investment spending over the next year.
However, there are distinct regional differences, with plans to increase spending more prevalent in Central Canada and the manufacturing sector. Energy-related regions and sectors expect to continue to see a decrease in spending.
A lower dollar is also affecting investment decisions as some businesses suggest they plan to restrain spending as a result of higher costs for imported machinery and equipment. Others, which benefit from higher margins on U.S.-dollar denominated sales, plan to use the profits to increase investment.
Meanwhile, the Bank of Canada report also found plans to hire staff have improved in areas less affected by energy prices with the overall balance of opinion on hiring over the next 12 months improving.
The outlook compared with a survey by Statistics Canada on Monday that suggested capital spending this year on non-residential construction and machinery and equipment is expected to slip 4.9 per cent to $251.8 billion compared with 2014.
Spending by the mining, quarrying and oil and gas extraction sector is expected to fall 18.7 per cent to $67.9 billion.
Meanwhile, the Bank of Canada report also found plans to hire staff have improved in areas less affected by energy prices with the overall balance of opinion on hiring over the next 12 months improving.
The number of firms reporting labour shortages that are hurting their ability to meet demand remains low and labour shortages are generally less intense than a year ago.
The Bank of Canada’s Senior Loan Officer Survey, which was also released Monday, suggested that overall business-lending conditions were broadly unchanged in the second quarter with a tightening in the oil and gas sector.
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