Canadian Economy Still Holding Its Own, But Fires Big and Small Hard to Ignore

The most recent quarterly Business Outlook Survey conducted by the Bank of Canada indicates that the Canadian economy is still going strong; however, many business leaders have voiced their concerns, too. Starting with the good news, approximately 60% of companies said they are barely keeping up with demand for products/services, mostly due to labor shortages. Particularly active is the service sector and, as far as geographical regions go, Western Canada remains the hottest.

Usually, when production capacities are bursting at the seams, it implies aggressive economic growth and rising price levels. However, considering how strong the Canadian dollar is, as well as the increasing commodity prices, overall prices and inflation are expected to hold their horses for the time being.

However, the Bank of Canada’s survey respondents were very jittery about the economic outlook, predominantly due to weakening economic growth south of the border, as well as the recent appreciation of our loonie.

In addition, for the first time in this recent quarter, the Bank of Canada included information concerning credit conditions in North America, prompted by the subprime credit crisis that first burst into flames last August. The results show that 60% of businesses found credit conditions unchanged, 32% found them more difficult, while eight percent believed credit conditions have actually eased.

Now, just looking at numbers, one may find that most Canadian businesses are still confident that the credit supply in Canada is unaffected. However, the sample of respondents answering this question was small, so the actual outlook could be much worse.

Now, some of you might think that this is just another survey, another bunch of stats pulled together in pages and pages of some expensive report. Nothing could be further from the truth. In fact, the quarterly Business Outlook Survey plays a prominent role in the way the Bank of Canada formulates its monetary policy.

Last summer, when the Canadian economy was running with all engines at full speed, interest rates had to be raised to trim inflation to size. Although it looked like interest rates were expected to go up, the Bank of Canada listened to Canadian businesses’ feedback and held off on more rate increases.

And as it became clear that the credit crisis was spreading faster than a plague and has thrown global markets into a tailspin, despite the Canadian economy still being hot, the Bank of Canada cut rates in December. If we were to believe that Governor Dodge relies on feedback from Canadian businesses, interest rates are more than likely to be cut again next week.

The most recent quarterly Business Outlook Survey conducted by the Bank of Canada indicates that the Canadian economy is still going strong; however, many business leaders have voiced their concerns, too. Starting with the good news, approximately 60% of companies said they are barely keeping up with demand for products/services, mostly due to labor shortages. Particularly active is the service sector and, as far as geographical regions go, Western Canada remains the hottest.

Usually, when production capacities are bursting at the seams, it implies aggressive economic growth and rising price levels. However, considering how strong the Canadian dollar is, as well as the increasing commodity prices, overall prices and inflation are expected to hold their horses for the time being.

However, the Bank of Canada’s survey respondents were very jittery about the economic outlook, predominantly due to weakening economic growth south of the border, as well as the recent appreciation of our loonie.

In addition, for the first time in this recent quarter, the Bank of Canada included information concerning credit conditions in North America, prompted by the subprime credit crisis that first burst into flames last August. The results show that 60% of businesses found credit conditions unchanged, 32% found them more difficult, while eight percent believed credit conditions have actually eased.

Now, just looking at numbers, one may find that most Canadian businesses are still confident that the credit supply in Canada is unaffected. However, the sample of respondents answering this question was small, so the actual outlook could be much worse.

Now, some of you might think that this is just another survey, another bunch of stats pulled together in pages and pages of some expensive report. Nothing could be further from the truth. In fact, the quarterly Business Outlook Survey plays a prominent role in the way the Bank of Canada formulates its monetary policy.

Last summer, when the Canadian economy was running with all engines at full speed, interest rates had to be raised to trim inflation to size. Although it looked like interest rates were expected to go up, the Bank of Canada listened to Canadian businesses’ feedback and held off on more rate increases.

And as it became clear that the credit crisis was spreading faster than a plague and has thrown global markets into a tailspin, despite the Canadian economy still being hot, the Bank of Canada cut rates in December. If we were to believe that Governor Dodge relies on feedback from Canadian businesses, interest rates are more than likely to be cut again next week.