Bank of Canada's 2011 Q4 Business Outlook Survey Weighed Down by Concerns about Global Outlook and Domestic Demand

• The outlook for future sales turned slightly negative for the first time in eleven quarters though this in part reflected strong activity in previous quarters
• Firms continued to indicate a preparedness to take on new workers at an even faster pace relative to Q3
• Q4 credit conditions from a borrower's perspective, as surveyed in the Business Outlook Survey, indicated conditions no longer easing
• 92% of respondents saw inflation remaining within the Bank of Canada's target range of 1% to 3% over the next two years up from the 88% response in Q3
• The Senior Loan Officer Survey, reflecting credit conditions from the lender perspective, indicated limited change after eight quarters of generally easing conditions

The Bank of Canada simultaneously released both its Business Outlook Survey (BOS) and its Senior Loan Officer Survey (SLOS) for 2011 Q4 this morning. The BOS survey indicated a deterioration in the outlook for sales a year ahead relative to the past year for the first time in eleven months. With respect to the key credit conditions component, borrowers no longer indicated that conditions were easing as had been the case over the previous nine months. From a lender's perspective, as reflected in the separate SLOS survey, there were similarly relatively unchanged conditions after eight months of generally easing credit conditions. (The BOS survey was conducted over the period November 14 to December 14, 2011 while the SLOS survey reflected opinions over the period December 5 to 9, 2011.)

The simultaneous release of the BOS and SLOS surveys provide a read on credit conditions from both the borrower's and the lender's perspective, respectively. The two surveys suggested that credit conditions are no longer easing. For example, the diffusion measure in the BOS (i.e., the difference between those seeing tighter versus easier conditions) turned positive with a reading of 5 compared to -13 last quarter. The Q4 reading reflected 28% indicated conditions had tightened (versus 11% in Q3) relative to 23% who indicated credit conditions had eased (versus 24% last quarter). The deterioration was reportedly due to “an increase in borrowing costs.”

The diffusion measure from the SLOS survey on business-lending practices did remain negative but barely so at -6.3 and compares to -26.9 in Q3. The survey also indicated that “the balance of opinion regarding the demand for credit from financial institutions increased during the fourth quarter … mostly related to an increase in financing for general purposes.”

The deterioration in future sales was in part a reflection of strong sales in earlier quarters not expected to be maintained. This was reportedly the case for a number of firms in Western Canada. This earlier strength was captured in the diffusion measure for activity over the past twelve months remaining essentially unchanged at a high 29 relative to 30 in Q3. The more current reading reflected 54% of respondents indicating greater activity versus 25% indicating a lessening in activity. Firms indicated a continued preparedness to take on new workers with this measure strengthening to 45 in Q4 from 38 in Q3. M&E investment was expected to remain strong as well with a diffusion measure of 21 which was down only slightly from a Q3 reading of 22.

The earlier strength in activity likely helped explained a slight deterioration in the ability of firms to meet a spike in demand where the total percentage of respondents indicating some or significant difficulty rising to 46% from 43% in Q3. There was also a slight increase in respondents indicating labour shortages to 29% from 25% over the last two quarters. On the inflation front conditions were relatively quiescent. For example, input prices are expected to rise at about the same rate over the next year as they did over the past year. With respect to output prices there was a slight bias to expecting prices to start rising at a slower rate.

Inflation expectations also moderated with those respondents expecting inflation to remain within the Bank of Canada's inflation target of 1% to 3% over the next two years rising to 92% from 88% in Q3. Within these overall percentages, there was a rise in those respondents that expected inflation to remain in the upper half of the range (2% to 3%) which rose to 51% from 47% previously that largely mirrored a drop in those expecting inflation to rise above the target range to 4% from 7% in Q3.

The BOS survey suggests that respondents see growth over the next year slowing relative to what was experienced over the past year. In part this reflects the exceptionally strong growth experienced particularly in Western Canada over the past twelve months that was not expected to be sustained. This moderation in expected growth was also in part attributable to concerns about the global economic outlook. This concern has been abetted by the festering European sovereign debt issue and upward pressure on the cost of capital. These external risks have been highlighted by the Bank of Canada as representing a key downside risk to growth being sustained in Canada. With these pressures contributing to some moderation in expected growth and likely to persist as we go into 2012, the Bank of Canada is expected to keep monetary policy highly accommodative over the near term to counter the financial market pressures.