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 positiveWhile 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 salesUncertainty 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 laborHiring 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 existsCapacity 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.
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