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Canadian firms expect gradual recovery

OTTAWA - The Bank of Canada’s spring survey of businesses is providing further evidence that the economic recovery is taking hold, but that key decision-makers expect improvements will be gradual rather than robust.

Canadian firms are saying they expect sales to increase modestly over the next year. They also plan to hire more workers and invest more on new equipment and machinery.
 
But most also report that they are operating below their capacity and expect to do so for at least the next six months.
 
“Firms expect a modest increase in sales volumes following declines over the past year,” the central bank said today.
 
“Firms reported that sales expectations are supported by the U.S. general economic recovery, an improving near-term U.S. economic outlook, and, in a growing number of cases, their own initiatives to reposition themselves for growth.”
 
The quarterly survey of 100 key firms is also often cited by the central bank as a factor in its forecasts
and decisions about interest rates.
 
The latest result, while positive, is also muted enough that it is unlikely to put additional pressures on the Bank of Canada to move more quickly than it otherwise would have on interest rates.
 
Recently, some economists have predicted the central bank would start raising interest rates at the June 1 scheduled announcement date, about a month-and-a-half before governor Mark Carney’s conditional commitment.
 
With the economy growing at an expected six per cent clip in the first quarter, on the heels of a five per cent advance in the last three months of 2009, there is no longer any need to keep the policy rate at the emergency level of 0.25 per cent, the analysts argue.
 
But business leaders seem to be less certain that the economy will continue to speed ahead at such a accelerated rate.
 
On many of the indicators surveyed, the firms are telling the bank that their views have not changed in the past three months and in some cases, they have become more cautious.
 
While 64 per cent of firms expect their sales volume to rise in the next 12 months over the previous year, the balance of opinion on this question was slightly lower than during the winter survey.
 
As well, the balance of opinion on hiring intentions is high, but still slightly lower than it was in the winter survey.
 
The central bank says 50 per cent of firms say they intend to hire more workers in the next year than they did in the previous 12 months.
 
More firms expect inflation to be two to three per cent range over the next two years, but nearly all still anticipate prices to remain well anchored within the central bank’s range of one to three per cent annual inflation range.
 
A separate survey of senior loan officers showed that over all lending conditions are improving, but the firms themselves say they are about the same as they were three months ago.
 
More critically, “many firms noted that access to credit remains more restrictive than it was prior to the intensification of the financial crisis in September 2008,” the bank said.
 
The most positive of the indicators was on firms’ investment expectations. Forty-three per cent of firms said they expected to increase their spending on machinery and equipment over the next 12 months, with only 21 per cent saying it will likely be lower.
 
“Rather than just repairing or replacing existing equipment, firms are increasingly focusing investment spending on expansion — often into new markets or product lines — or on improving efficiency. This is particularly the case among manufacturers,” the bank said.
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