OTTAWA - The impact of tight money and the U.S. economic malaise is beginning to sap the confidence of Canadian businesses, says a new survey from the Bank of Canada.
While far from panicking over the worsening economic conditions, the 100 businesses polled in February and March suggested Canada's corporate world sees an easing trend developing in what they produce, sell and invest for the next 12 months.
"The increased pessimism about sales is unsurprising, given the heightened discussion of a possible U.S. recession that was evident over the survey period," said Rishi Sondhi, an economist with the Royal Bank.
The central bank survey released Monday dovetails with a Conference Board poll of chief executives in the United States showing American business confidence at the lowest level since late 2000, and firms saying they are scaling back on hiring.
The Bank of Canada survey found a growing number of businesses reporting that financing investment and expansion is becoming more difficult as a result of the global credit crunch, the third straight quarter that firms have reported more stringent credit.
"Reports of tighter credit conditions were widespread across sectors and regions, with most firms attributing the tightening to a market-wide repricing of risk," the central bank said Monday.
Forty-one per cent of the firms said credit conditions were tighter in the past quarter, against 17 per cent saying they were looser.
This was likely reflected in muted business investment plans, with 28 per cent of firms saying they expected to increase spending on new machinery and equipment in the next 12 months, while 27 per cent expected to spend less.
"Among firms planning to invest less, most of whom are based in Central and Eastern Canada, the most common reason cited was significant investment spending over the past year, followed by a desire to preserve cash given uncertainty about the economic outlook," the bank said.
As well, 38 per cent expect sales growth to slow this year, as opposed to 36 per cent that forecast their sales will increase at a faster pace. This is the first time a plurality of Canadian businesses have predicted slower sales growth in the bank survey since the fourth quarter of 2001, during the last U.S. recession.
And after several surveys showing demand in the economy was outpacing companies' ability to produce, the proportion of firms reporting capacity constraints fell from 60 per cent to 44 per cent, while the number of firms reporting labour shortages slipped to 30 per cent.
BMO economist Michael Gregory said the report shows tight credit conditions are plaguing the economy and the Bank of Canada will likely take action on April 22 by cutting rates another half-point.
However, RBC's Sondhi noted that firms were expecting their own output prices to increase at a faster pace over the next 12 months and that some firms expected to pass through higher input prices.
The companies said higher oil and food prices, along with the rising costs of imports from China, will contribute to increased production costs. As well, more firms believe Canada's inflation rate will exceed three per cent over the next two years.
But Sondhi agreed that the Bank of Canada appears more focused on the slowing economy than on inflationary risks, and predicted a 75-basis-point cut to the overnight rate to 2.75 per cent by midyear.
