Businesses gloomier about prospects

OTTAWA — Canadian companies have grown more pessimistic about their sales prospects for the coming year and plan to cut investment and hiring, says a Bank of Canada survey.

OTTAWA — Canadian companies have grown more pessimistic about their sales prospects for the coming year and plan to cut investment and hiring, says a Bank of Canada survey.

The central bank’s quarterly business outlook survey released Monday found businesses generally gloomier on most measures, but analysts noted that the sentiment is still well above what would be considered recessionary.

“Given the circumstances abroad, this is encouraging news and supports the view that Canada’s economy is not in a recession, nor does one seem imminent,” said David Madani, chief Canadian economist with Capital Economics.

As expected, the results suggest firms are concerned about how the weakness in the U.S. economy and general uncertainty in the global economy will effect them in the next 12 months.

In a speech in Ireland on Monday, Finance Minister Jim Flaherty called the European debt crisis the world’s “most immediate and pressing problem” that threatens the global recovery unless leaders take decisive action.

The Bank of Canada’s survey reinforces the skittishness about the future, while also suggesting many firms still harbour a level of expectation that solutions will be found before the worst occurs.

“The balance of opinion on future sales growth has fallen to just above zero,” the report stated, “indicating that firms now expect little change in the pace growth over the next 12 months.

“Businesses still intend to increase investment and employment, but the balance of opinion are lower.”

The key positive was that companies reported greater sales over the last 12 months than in the previous year.

TD Bank analyst Diana Petramala said the results are not a surprise given the recent downturn in the global outlook, and ongoing crisis in Europe over sovereign debt.

“The economic reports have been consistent with shaky business sentiment,” she said. “Private sector employment fell for two consecutive months through August and September, and import data for machinery and equipment suggests that business spending on such items was weak in the third quarter,” she pointed out.

But she added results are not weak enough to signal the onset of a new recession.

“Intentions are still positive, which is encouraging considering concerns raised earlier by some analysts that business investment may have been declining,” added Madani, the Capital Economics analyst.

Bank of Montreal economist Doug Porter also noted that despite the lower levels of confidence, businesses “still expect growth.”

Given that firms are not expecting any dramatic reversal or improvement, Porter said the Bank of Canada is likely to leave interest rates where they are at the next scheduled meeting later this month. Markets had built in a possible cut to the one-per-cent overnight rate, but recent data showing the economy continues to grow — if at snail’s pace — makes that less likely.

The biggest dropoff in business sentiment was on sales expectations, with the balance of opinion — the difference between those expecting sales to grow at a faster face, and those anticipating slower sales growth — falling to six percentage points, about one-third the level of the summer survey.

It was the lowest result on this question since the 2008-09 recession.

“Amid concerns about the level of demand, many firms are forecasting an increase in sales growth over the next 12 months reported that they expect to achieve this by introducing new products or by adopting strategies to increase market share,” the bank added.

On the important hiring question, 52 per cent of firms said they still believed they would be taking on new employees, as opposed to 14 per cent who said they intended cut back. The healthy 38 per cent balance of opinion was still down from the more than 50 per cent reading obtained in the summer.

Similarly, twice as many firms expect to increase their level of investment in machinery and equipment than those who do not, but the 22 per cent balance of opinion was slightly lower than in the summer reading and the lowest in over a year. A few firms said planned projects may be placed on hold.

In line with expectations of diminished demand, the balance of opinion of firms was that they would be forced to slow the pace of price growth for their products and services. This was especially true in Central and Eastern Canada, the bank said.

In a separate survey, the bank said senior loan officers reported that business lending conditions are continuing to ease, although at a lesser rate than three months ago. Some large firms reported the costs of raising capital have increased.

The bank said it surveyed firms between Aug. 22 and September 22, while the poll of loan officers was conducted during the third week of September.