Canada Business Sentiment Rebounded Before Second-Wave Lockdowns

(Bloomberg) -- Business sentiment rebounded to above average levels at the end of last year on strengthening domestic and foreign demand, according to the Bank of Canada.

The results from the central bank’s quarterly survey of executives show business conditions improved sharply amid a rebound that brought a number of sectors back to near pre-pandemic levels of activity. Managers reported stronger sales outlooks, investment and hiring plans and tightening labor markets. At the same time, the recovery is uneven, with about one-third of businesses reporting they continue to struggle.

“Robust foreign demand, improved confidence related to vaccines, and ongoing government relief programs all contribute to the improved outlook,” the Bank of Canada said in its Business Outlook Survey. “Although business sentiment has strengthened broadly, it remains solidly negative for many firms, including those in high-contact services.”

The composite gauge of sentiment rose to 1.3 in the fourth quarter, the highest since 2018 and above historical averages. That’s up from -2.2 in the third quarter and a decade-low of -6.9 in the second quarter.

The results of the survey will be a comfort to policy makers, suggesting businesses felt the economy was well on track to recovery at the end of last year -- consistent with economic data at the time. Still, the interviews in the Bank of Canada survey were conducted between from mid-November to early December, before new economy-wide restrictions were imposed amid a second wave of Covid-19 cases.

Key Highlights

• Firms are anticipating a strong rebound in sales from historically low levels last year. Some 67% of respondents anticipate sales growth will accelerate over next 12 months with indicators of future sales back to positive levels
• “Still, one-third of businesses do not expect their sales to return to pre-pandemic levels in the next 12 months, suggesting that the recovery will be uneven”
• About 48% of firms surveyed expect investment in machinery and equipment to be higher over the next 12 months, the highest reading since 2018 and about 10 percentage points above historical averages
• Just over half -- 54% -- of businesses expect to increase employment over the next year, also historically high. But it’s uneven, “as one-quarter of firms expect the size of their workforce to remain below pre-pandemic levels for at least another year”
• Some 57% of executives reported they would face at least some capacity constraints if demand increased unexpectedly. That’s the highest since 2018, and particularly evident among goods producers
• About one-third of businesses report labor shortages, up from 25% the previous quarter and above average