Bank of Canada survey suggests business sentiment picked up after declining [UPDATED]

OTTAWA—Business sentiment in Canada has picked up to show a slight improvement after falling earlier this year, according to a new survey by the Bank of Canada.

The central bank said Friday that its summer business outlook survey, which measures corporate expectations, bounced back after falling into negative territory at the start the year.

“The business outlook survey indicator edged up to its historical average consistent with a slight improvement in business sentiment,” the Bank of Canada said in its latest quarterly survey of senior management at roughly 100 firms.

The improved outlook for the economy came as Statistics Canada reported real gross domestic product grew 0.3% in April to kick off the second quarter.

The result was down from a showing of 0.5% in March, but more than the 0.1% economists had expected, according to Thomson Reuters Eikon.

The business outlook survey, which was done in May and early June, found that following some softness in past sales, businesses expected an increase in sales growth over the coming year backed by domestic and foreign demand.

“Sales optimism is concentrated in Central Canada and includes positive expectations for housing activity. Nevertheless firms anticipate weakness in sales tied to the Western Canadian oil industry to persist,” the report said.

The Canadian economy hit a weak spot late last year as oil prices fell and the country posted its weakest back-to-back quarters of growth since 2015.

The central bank’s spring business outlook survey indicator dropped into negative territory in the wake of that weakness, however recent data has shown an improving economy.

Robert Kavcic, a senior economist at BMO Capital Markets, said the survey was probably a little bit stronger than most were expecting, and consistent with the GDP data in suggesting that the weakness in the Canadian economy was temporary.

“For the Bank of Canada, this is one more reason to sit back and just listen while other central banks sing more dovish tunes,” Kavcic wrote in a report.

“Had this survey deteriorated further, that might have been harder to do, but that wasn’t the case.”

The Bank of Canada has kept its key interest rate target on hold in recent months, predicting that the weakness in the economy to start the year was temporary and that growth would pick up this year.

The Canadian central bank’s position stands in contrast to that of the U.S. Federal Reserve which has suggested it is prepared to cut interest rates later this year.

In its reading of the Canadian economy, Statistics Canada said the mining, quarrying and oil and gas extraction sector gained 4.5%, boosted by gains in the energy sector as output increased following government-mandated production cuts in Alberta that started in January.

Oilsands extraction increased 11.0% as production restrictions were eased, while oil and gas extraction, excluding oilsands, was up 0.5%.

However, the manufacturing sector pulled back 0.8% in April, the largest monthly contraction since August 2017.

CIBC senior economist Royce Mendes said the current period of strength in the economy is making up for past weakness.

“As a result, we expect monthly growth readings to settle back down in the second half of the year, revealing that underlying momentum is closer to the 1.5% year-over-year pace seen today after looking through all the recent volatility,” Mendes wrote in a report.

“Still, the brief period of strength combined with on-target core inflation readings will leave the Bank of Canada able to continue justifying its on-hold stance, despite renewed easing-biases from other major central banks.”

The Bank of Canada’s business outlook survey noted Friday that intentions to increase investment spending and to hire are positive in most regions and sectors.

Reports of labour shortages increased from a low level last quarter, but the bank noted they were not widespread.

“Firms often reported shortages of skilled or specialized labour,” the report said. “Nearly half of all respondents judged labour shortages to be unchanged compared with 12 months ago, with some indicating that hiring has been difficult for more than a year.”