Positive news buoys business confidence

(July 12, 2004) Canadian businesses are more optimistic about the economy than they were in the spring, according to the Bank of Canada’s Business Outlook Survey, with that optimism based on improvements in the overall global economy.

“Businesses remain generally optimistic about future sales volumes,” the bank said in its report. “This outlook is based largely on favourable economic prospects both domestically and abroad.”

The bank survey found that businesses have increased their investment intentions, as they come under increased pressure to improve their production capacity. Respondents also indicated they would offer workers larger wage increases this year, though these should still remain moderate.

Forty-seven per cent of respondents said they expected to hire more staff over the next 12 months, with 37% saying that they currently lacked the labour supply to meet production demands.

“These pressures notwithstanding, firms expect to increase output prices at the same pace as in the past 12 months,” said the bank report. “This reflects the continued strong competition reported in many sectors.”

One of the much-heralded challenges thought to be facing Canadian firms over the past year has been the rapid depreciation of the U.S. dollar. But according to TD Bank Economics, exports have not been punished to the extent expected, despite the rapid rise in the loonie.

“Without any chance to adjust cost or price structures, Canadian exporters realized a dramatic and sudden loss in competitiveness with their largest trading partner, the United States,” read a report from Beata Caranci, economist at TD Economics. “And yet, this did not turn out to be the knockdown punch that many had feared.”

It had been feared that not only would Canadian goods become less competitive in the prime export market of the U.S., but that relatively cheap American goods would flood the Canadian market, delivering a double blow to Canadian businesses.

While imports did rise by 4.1% over the past five quarters, the seemingly insatiable appetite for consumer goods has limited the downside for Canadian producers.

“In the end, the Canadian dollar rally not only had a relatively short-lived impact on exports but it also was not the boon to imports that many had anticipated,” Caranci went on to say. “Indeed, the Canadian economy has weathered the rise in the loonie rather well, ending the first quarter of 2004 with a $41 billion goods trade surplus with the rest of the world.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com