REPEAT: MNI BOC ANALYSIS: Survey Makes Case For Tone Shift

Repeats Story Initially Transmitted at 18:47 GMT Apr 9/14:47 EST Apr 9

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada's Business Outlook Survey published

Monday did not validate increased caution from the central bank in light of U.S.

protectionist and fiscal policies. To the contrary, it could provide a stepping

stone to start shifting towards a slightly more aggressive tone.

     Overall, the spring business outlook survey showed business sentiment

"continues to be positive", with sales expected to grow at a faster pace over

the next 12 months.

     Capacity pressures are evident across regions, and inflation expectations

picked up.

     On the external front, expectations for U.S. growth strengthened further

even as rising U.S. protectionism and lower competitiveness that could limit the

benefits, according to "some" firms.

     --NO CLEAR IMPACT

     In fact, when asked about the impact of U.S. policies and the uncertainty

around them, most firms report no impact so far and "anticipate no clear impact

over the next 12 months."

     Among those which anticipate a negative impact, rising U.S. protectionism,

including the renegotiations of the North American Free Trade Agreement, was the

key culprit.

     Such firms cited "adverse effects" on sales and higher costs, resulting for

instance from tariffs.

     Others that were adversely affected, especially in the energy sector, cited

U.S. tax cuts as a source of diminished competitiveness.

     Some also expected a lower Canadian business confidence.

     The BOC has mostly integrated the impact of uncertainty related to U.S.

policies through lower investments. It estimated in January that trade-policy

uncertainty is expected to reduce the level of investment by about 2% by the end

of 2019.

     So Monday's survey has the potential to change that assessment, perhaps for

the better.

     --CAPACITY PRESSURES

     Along with investment and exports, the BOC is watching capacity pressures,

which, according to Monday's survey, "are evident in most regions." Indicators

of both capacity pressures and labor shortages edged down but remain at high

levels.

     In fact, most remaining slack is concentrated in the energy sector.

     --INFLATION EXPECTATIONS UP

     On the price front, while the BOC's preferred measures of core inflation

have been trending up, Monday's survey showed expectations have also climbed.

     Over the next two years, more than half of businesses surveyed - 53%, the

highest rate since the first quarter 2012 - expect inflation to be between 2%

and 3%, the upper end of the BOC's 1%-3% range.

     Meanwhile, 46% expect inflation to be between 1% and 2%, the lowest

percentage in six years.

     --HARD DATA WEAKNESS

     Yet the BOC remains data dependent, and on that front, hard data have not

been encouraging, with January GDP down 0.1%, mostly on energy and weakness in

real estate.

     February real estate data showed further real estate weakness and analysts

are generally anticipating a first quarter GDP that underperforms the BOC's 2.5%

annualized growth estimate.

     While this should leave the cautious tone intact, Monday's BOC's survey

findings on many fronts showed businesses might not be as worried as

anticipated.

     As a result, the tone of the BOC could start shifting at the April meeting,

especially if the outlines of a NAFTA deal are announced.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com