The Business Outlook Survey (BOS) was conducted from 5 November through 28 November. This is notable as it covers a period when one of Canada's main oil price benchmarks, Western Canada Select, was under intense pressure that eventually pushed the price, temporarily, below its February 2016 low. Through November, there was an increasingly urgent debate as to what should be done to respond to oil market developments. Eventually, in early December, the Alberta Provincial Government announced a mandated decline in oil production to start in January 2019.
The developments in the oil patch, and increased trade tension between the US and China, negatively affected business sentiment in the BOS. This was reflected in the balance of opinion on the outlook for future sales falling to -1 from the prior 15. The BoC said that this implies that firms "expect sales growth to stabilize" over the next 12 months. As well, the Business Outlook Survey Indicator (BOSI) fell to 2.2 from 2.8.
There were some regional/sector differences in corporate sentiment. For example, firms in Western Canada, particularly those exposed to oil prices, and firms exposed to housing in some regions, expect demand to weaken over the next 12 months. Meanwhile firms elsewhere were more optimistic.
There was thus not a general decline in business sentiment. We would also note that though the BOSI did drop in Q4, at 2.2, it remains elevated compared to readings observed over the past decade. Bank of Canada commentary also highlighted the resiliency of business sentiment despite the increased uncertainty in some sectors/regions. For example, the Bank said that business investment intentions remained solid, and that there are still widespread plans to increase employment. Meantime, capacity pressures linger, with 56% of firms indicating that they would face at least some difficulty meeting an unexpected increase in demand. As well, labour markets remain tight, amid elevated, and intense, labour shortages.
More than 50% of firms expect inflation to be in the top half of the Bank of Canada's inflation target range of 1% to 3%, largely unchanged from the October BOS.
Though Business confidence declined relative to the prior Business Outlook Survey, corporate sentiment, overall, remained positive in November. This is one of the last major releases before the next Bank of Canada policy announcement on 9 January. The decline in business sentiment, and more recent developments such as the decline in global equity markets, are sufficient in our view to justify the Bank leaving its policy rate unchanged at 1.75%. Meanwhile, the overall resilience of business sentiment seems sufficient for the Governing Council to maintain a tightening bias.
That said, the results of the Survey are also somewhat stale, and might not be that helpful in assessing the appropriate stance of monetary policy now. For example, at the time of this Survey, inflation had been reported as above 2% for the prior nine months, even though it had declined from 3.0% earlier this year. However, inflation fell below 2% in November and December, as gasoline prices tumbled amid downward pressure on domestic and global oil prices. Inflation break-evens in the bond market have also fallen sharply, suggesting that inflation pressures have eased. Hence, we believe that firms would likely currently foresee more moderate inflation than was reported in the BOS.
As well, the BOS was completed before Alberta announced the mandated decline in oil production. On 6 December, Bank of Canada Governor Stephen Poloz discussed the "painful adjustment" underway in Western Canada and that this adjustment will have a "meaningful impact on the Canadian macroeconomy."
In our view, the Bank of Canada will leave the policy rate at 1.75% before raising rates by 25 basis on 6 March, and 29 May. We then look for the policy rate to remain at 2.25% through year end, which we think is consistent with the results of the BOS. Recent developments, however, suggest to us that there is a greater probability of only one rate hike in 2019, than for the Bank to raise rates three times.