Canadian Businesses Are Optimistic About Recovery, Bank of Canada Survey Finds -- Update

OTTAWA--Canada's economic recovery is expected to broaden to include more businesses with ties to the hard-hit services sector, as vaccination rates continue to rise and government restrictions are lifted, a Bank of Canada survey found.

The central bank's quarterly survey of business expectations found that overall sentiment improved during the spring to reach the highest level since the bank began measuring that indicator nearly 18 years ago. Investment and hiring plans were widespread, the survey found, and most firms reported that their sales prospects, as measured by indicators such as order books, advance bookings and sales inquiries, had improved compared with a year earlier.

"The number of firms with improved indicators of future sales... is at a record high," the central bank said. It said that was "a concrete signal of a broad-based strengthening in demand relative to a year ago."

The latest survey was conducted in May, at a time when Canada's vaccination campaign was ramping up and many provinces were announcing plans for reopening their economies. As of July 4, roughly 69% of Canadians had received at least one dose of a Covid-19 vaccine --ahead of the U.S. and U.K.-- and 35% were fully vaccinated.

The Bank of Canada's benchmark overnight interest rate has remained near zero since the start of the pandemic, and its latest guidance indicates that is unlikely to change before the second half of 2022. The central bank pulled back on its quantitative easing program in April, citing progress in the economic recovery, and is now targeting weekly purchases of about 3 billion Canadian dollars ($2.43 billion) in Canadian government bonds, down from a previous level of at least C$ 4 billion.

The bank's next interest-rate announcement is due on July 14, and will be accompanied by a monetary policy report.

The strong survey results suggest the Bank of Canada will maintain a positive tone in next week's communications, TD Securities strategists Andrew Kelvin and Robert Both said in a note. However, they cautioned there is still a long way to go before the economy has fully recovered, "so there is no reason to expect a significant change in narrative at next week's announcement."

The Bank of Canada survey found that businesses with ties to high-contact services, such as restaurants and salons, were gaining confidence that their sales would rebound as vaccination rates continue to rise and restrictions are lifted. That should lead to "an important broadening in the recovery ahead," the central bank said.

Some of the advance in overall business sentiment is linked to businesses comparing their current circumstances with the weak levels from the spring of 2020, the central bank said. Still, it added that positive sentiment had become more widespread even among businesses that were less affected by the pandemic.

Meanwhile, businesses' inflation expectations increased, although the central bank said a majority of those surveyed believe most drivers of inflationary pressures will be temporary. About one-third of businesses anticipate inflation over the next two years will be above 3%, the survey found, while roughly half expect it will be in the upper half of the Bank of Canada's 1% to 3% target range.

A separate survey of consumer expectations, conducted during the first half of May, found greater optimism and confidence among individual Canadians that the pandemic may be coming to an end. Expectations for spending growth were high, the survey found, which could be the result of pent-up demand for goods and services that weren't available while pandemic restrictions were in place.

Consumer expectations for inflation over the next 12 months rose in the latest survey, corresponding with the recent rise in the consumer-price index.

Write to Kim Mackrael at kim.mackrael@wsj.com -0-


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