The Bank of Canada's latest quarterly Business Outlook Survey, conducted May 15 to June 10, was modestly firmer, ending the weaker trend seen over the prior two quarters. The survey again highlighted the deepening shift in growth away from Western Canada toward manufacturing and exports in Central Canada.



Future sales expectations rose 4 ppts to +8%, the "oil price shock continues to weigh importantly on business sentiment", restraining the improvement in the survey. The outlook for investment was slightly more positive as well, climbing 3 ppts to 7%, while employment intentions climbed 6 ppts to 26%. The divergence between energy producing (downbeat) and non-energy producing (upbeat) regions was highlighted for these components as well.

Capacity pressures unexpectedly increased in the quarter, despite the contraction in Q1 GDP and a decline in capacity utilization. Consistent with the theme of the report, better sales among manufacturers in Central Canada lifted the difficulty meeting an unexpected increase in demand to a 7-quarter high of 47%, with all of the increase in the "significant" category.



Reports of labour shortages dipped another 2 ppts to 19%, far below the historical average of 35%, and many firms are reporting that shortages are less intense than a year ago. There's nothing here to change the Bank of Canada's view that significant slack remains in the economy, and specifically the labour market.

The inflation section had some big swings, but shouldn't impact the BoC's thinking materially. A net 26% of firms expect input prices to fall, while 13% anticipate cutting output prices over the next year. Firms noted that they felt most of the impact from the Canadian dollar's depreciation had already been passed through, suggesting easing price pressures.



Inflation expectations remain firmly anchored around the 2% target, with just 3% of firms expecting sub-1% inflation, while those expecting 1%-to-2% rose by 8 ppts to 68%. Headline inflation is expected to drift higher through the second half of the year, as the steep energy price declines in 2014 fall out of the calculation, says BMO economics.