As confidence rises, Canadian firms say they are readying to boost investment

After nearly a year of caution and gloom, Canadian business leaders say they are finally seeing the right conditions taking shape to support investment.

The improved outlook comes from the latest Conference Board reading of businesses’ sentiment showing confidence rose dramatically in the second quarter of this year to 101.5 on the index—10 points higher than three months ago and the highest level in more than a year.

What’s more, after a year of soft spending intentions, the latest survey found 50.9 per cent of company executives agreeing with the statement that now is a good time to invest. The balance of opinion on the question—the difference between those who agreed and disagreed—also rose 10 points.

“Business sentiment improved significantly in the second quarter,” said the Ottawa-based think-tank.

“Respondents were encouraged by the near-term outlook for their firms and for the economy as a whole, leading many to say they expect substantial increases in investment spending.”

One of the key factors was that almost 37 per cent of business leaders reported operating at or close to optimum capacity, as opposed to only 29 per cent three months earlier.

As well, firms are reporting being in sound financial position to invest and almost half said they anticipated bigger profits in six months.

Last week, the Bank of Canada projected business investment to remain moderate in the near term, but to strengthen “as the recovery in Canadian exports becomes more firmly entrenched, providing greater confidence about the prospects for global demand.”

The survey results follow on the heels of Thursday’s report detecting a similar boost in confidence among members of the Canadian Federation of Independent Business, which tend to be small and medium-sized firms. As well, a consumer confidence reading Friday found optimism in the U.S. at the highest level in six years.

Conference Board economist Pedro Antunes said there is fresh hard data behind the brightening mood, including a private sector resurgence in the U.S. that has supported growth in the face of “bad fiscal policy”—government restraint—chipping away about 1.5 percentage points from output.

Canadian data has also been stronger than expected of late. This week, retail sales were reported to have surged by 1.9 per cent in May over April, leading many economists to predict the growth number for May to come in at 0.3 per cent when the number is finalized next week.

In addition, manufacturing, construction, and wholesale trade figures all have come in stronger than expected, leaving the services sector the sole wild card for May. Nevertheless, the vast majority of analysts are discounting the Bank of Canada’s pessimistic one-per-cent call for second quarter growth, saying it could double that.

“After relentlessly pounding the drum for the past 18 months about how the U.S. economy was ready to roll and how Canada was going to take a back seat, we now sheepishly allow that Canada has a bit more oomph than expected,” wrote Bank of Montreal economist Doug Porter.

“We are awaiting May’s result before revising our broader forecast, but it now looks like Canada’s growth will challenge, if not top, the U.S. pace for all of 2013.”

The Conference Board cautioned that while sentiment is much more buoyant, support for investment remains below historic levels when the economy is seen as sound. It’s stronger, but only relative to the depths it had sunk to in the past year.

And Antunes notes that there are still plenty of risks in the global outlook—particularly the ongoing debt crisis in Europe—to keep firms from going all in on a growth scenario.

“There is more optimism,” he said. “But we have to remember we are no longer in a 2.5 or three per cent growth world. We’re in more of a two per cent potential economy. We do think the economy can pick up the remaining slack, but fundamentals are suggesting growth will be slower than it was in the early 2000s.”

The survey of 114 representatives firms throughout the country was conducted in a four-week period in May and June.

Among the other findings:

• 36.8 per cent of respondents expected economic conditions to improve over the next six months, as opposed to 5.3 per cent anticipating a deterioration;
• Almost two-thirds said their firms plan to increase capital spending over the next six months;
• 48.2 per cent said they anticipated being in a stronger financial position in six months’ time, as opposed to 6.1 per cent forseeing a weaker balance sheet.
—The Canadian Press