Canada's central bank says business sentiment at its lowest for 11 years

Canadian business sentiment has fallen to its lowest level since the 2008-2009 recession as sales slow and uncertainty about future growth remains elevated, according to a survey of executives released Monday by the Bank of Canada.

The Ottawa-based central bank polled businesses between May 12 and June 5 to gauge sentiment during the pandemic. The results show that even as provinces begin to reopen their economies, many businesses are still struggling with weak demand.

The plunge in sentiment is hardly a surprise, given that the nation fell into its deepest recession last quarter since the Great Depression. While there are some positive notes with the central bank highlighting that many businesses expect a fairly quick rebound, the overall gist of the data paints a business sector that has suffered a major shock.

Results “suggest that business sentiment is strongly negative in all regions and sectors due to impacts from the Covid-19 pandemic and the drop in oil prices”, the Bank of Canada said in a summary of its findings.

The composite gauge of sentiment declined to -7, the lowest reading since the financial crisis. Companies reported growing slack in capacity, easing price pressures and collapsing forward-sales expectations. Firms also signalled a significant decrease in capital spending plans, along with weakening hiring intentions despite the massive increase in job losses in recent months.

The survey “was extraordinarily weak, but that comes as no surprise given the survey was taken when swathes of the economy were still shut”, Benjamin Reitzes, Canadian rates and macro strategist at Bank of Montreal, said in a report.

Almost half of all executives surveyed reported a decline in sales in the past 12 months because of the impact from Covid-19, lower energy prices and heightened uncertainty. Businesses continue to expect weak demand in the future with more firms expecting lower future sales growth in the next year. Indicators of future sales – such as orders and sales inquiries – fell to record lows.

“Firms reported that, while capacity could resume quickly as the economy reopens and containment measures are lifted, the recovery in demand is expected to be more gradual,” the report said.

Still, business seems to be less pessimistic than they were during the financial crisis – with more than half of firms expecting their sales and employment levels to be near pre-pandemic levels within a year.

Government support seems to be buffering the economic fallout, with some firms citing the federal government’s wage subsidy program as helping to reduce the need for layoffs. The survey was also taken in May when lockdowns were being lifted, mitigating the impact on the numbers.

“The headline reading probably could have been even worse if the survey had been conducted a month earlier,” Andrew Grantham and Katherine Judge, economists at Canadian Imperial Bank of Commerce, said in a report.

While millions of jobs were lost in March and April due to the pandemic-induced shutdowns, jobs have started to come back and the results of the survey reinforce the view that employers are looking to rehire. A majority of firms that recently let go workers have plans to refill at least some of the positions in the next 12 months, the survey found.

Despite this, the era of tight labour markets in Canada is over. The share of businesses reporting major shortages of workers has declined significantly, suggesting a “broad-based increase in labour market slack”.