One of the more important reports emanating from the Bank of Canada is its quarterly update on business conditions since it sets out both positive and negative factors underlying the qualitative strength of the economy.

Parsing the report,^[1] we find that:

• The overall outlook is positive. While on balance the outlook for sales remains positive, firms expect sales to moderate from the 2017 performance; early 2018 data already confirm that this to be the case;                          
• The rise of U.S. protectionism threatens sales. Uncertainty regarding the outcome of the NAFTA negotiations continues to cloud the outlook for capital investment; firms also are very concerned with other potential protective measures, such as Buy American policy at the state level, that would restrict Canadian exports;
• A scarcity of skilled labor. Hiring intentions are positive, however, there continues to be a mismatch in which there are job openings but no qualified workers available; the skill scarcity is prevalent in many key manufacturing industries, hindering their prospects for greater output and outlays for future capital expansion;
• Excess capacity exists. Capacity utilization remains relatively high, however, it is important to remember that Canada lost over 10% of its manufacturing capacity during the 2008-9 financial crisis and has, as yet, not recovered fully from that loss of capital formation;
• The energy sector continues to underperform. The energy sector has to contend with relatively low oil prices, a large price discount on its non-conventional oil sales and capacity constraints in energy pipelines and rail transportation;
• Inflation is held in check. Inflation expectations are still well within the Bank’s inflation-control range of 1 to 3 %; and
• Credit restraints. Firms have indicated that monetary conditions are tightening, restraining proposed capital investment projects.

Looking at the early indications for 2018, Canada’s performance is, at best, mixed.GDP contracted by 0.1% in January, following on the heels of a steady decline in the growth rate for the second half of 2017. The trade sector has been in red numbers for more than six months, despite the Canadian dollar trading at around 77 cents. U.S. Oil production and exports continue to underperform. For the first quarter as a whole, Canada lost 30,000 jobs and the unemployment number remained at 5.8%, some distance from full employment. Lastly, the strongest sector, real estate, has turned down as sales fall off in the wake of recent changes in mortgage regulations coupled with a general softening in housing sales and prices in the major cities.

Given the survey results and the most recent economic data, it is not likely that we can expect the Bank of Canada to raise its policy rate next week. Unless there is a marked turnaround, increases in the bank rate should remain off the table for the coming months.

^[1] Bank of Canada, Business Outlook Survey, Spring,2018