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Business sentiment is softening in Canada, Bank of Canada outlook survey suggests

Bank of Canada Governor Stephen Poloz listens to a question during a news conference in Ottawa, Ontario, Canada, January 9, 2019. REUTERS/Chris Wattie

A new Bank of Canada survey has found that business sentiment is softening in the country as concerns linger about energy prices, the housing sector and trade uncertainty.

The central bank’s business outlook survey indicator fell from positive levels and turned slightly negative for the first time since the third quarter of 2016, a slip that the bank says suggests “a softening in business sentiment.”

The survey of executives, which was conducted in February and March, found that while investment intentions remain healthy outside of western Canada, businesses are less optimistic about sales demand going forward.

“Firms’ expectations for sales remain positive but have softened as several businesses are less optimistic about demand,” the bank said.

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“The main headwinds are a more uncertain outlook in the Western Canadian energy sector, continued weakness in housing-related activity in some regions and tangible impacts from global trade tensions.”

The Bank of Canada’s indicator on past sales growth turned negative, with 45 per cent of respondents reporting lesser sales growth while 39 per cent reported greater sales growth.

Capacity pressures also fell to levels not seen since the third quarter of 2015, with 31 per cent of respondents reporting they would have some to significant difficulty meeting demand.

“Some firms expect pressures to ease over the next 12 months, most often due to recent or planned hiring and investments, but several respondents also referred to softer demand expectations,” the central bank said.

That easing of capacity pressure gives the Bank of Canada more reason to stay on the sidelines when it comes to rate decisions, said RBC senior economist Nathan Janzen in a note.

“The easing in indications... only reinforces that move and increases the odds that the next Bank of Canada interest rate hike is a lot further away than thought just a few months ago,” Janzen wrote.

BMO Capital Markets senior economist Benjamin Reitzes also wrote in a note that the weaker results “strongly suggests” that the Bank of Canada will hold its current policy interest rate of 1.75 per cent through the year, “though the risks are tilted toward a cut, should a negative shock hit.” Still, it doesn’t mean it’s time to panic.

“While the responses were mostly weaker, they don’t reflect an economy falling off a cliff,” Reitzes wrote.

The business outlook survey involves interviewing business leaders from approximately 100 companies to gauge economic perspectives on topics such as demand and capacity pressure.

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