Canadian business sentiment has soared.

Canadian business sentiment has soared as bosses across the country prepare for a pick-up in economic activity, sales and employment amid better credit conditions, according to two Bank of Canada surveys released Monday.

The results of the central bank’s Summer Business Outlook Survey are a dramatic change in mood from the Winter and Spring reports, with 61% of businesses expecting sales to rise in the coming 12 months -- the highest reading since records began in 1998.

The expected rise is a welcome change for recession-weary companies, but it is important to note any increases will be off the back of a record drop in sales and, therefore, the outlook does not indicate a return to full health. As Douglas Porter, an economist at BMO Capital Markets, puts it: "[Sales] had nowhere to go but up."
The survey showed a record 69% of businesses recorded a drop in sales in the 12 months prior to the survey, which was taken between May 25 and June 18. Indeed, Bank of Canada commentary was cautious.

"Firms expect their activity to recover only gradually, and they continue to be cautious regarding investment," the survey of about 100 businesses found.
Such sentiment is in line with a report by the Conference Board of Canada on Monday that predicted a slow economic recovery.

The Conference Board said the recession will end in the second half of this year, but the effects of the global recession will linger well into 2010.
"The current recession is so widespread that its effects are expected to linger for longer than the typical business cycle," said Pedro Antunes, director of national and provincial forecast at the Conference Board. "The global recovery will be soft, and Canada is not expected to achieve economic growth significantly above its potential until at least 2011."

The Conference Board predicted gross domestic product will fall by 1.9% in 2009 and rise by 2.7% in 2010, a level weaker than historical post-recession growth levels.
Nevertheless, conditions are moving in a postivie direction. The central bank survey showed hiring intentions had improved in all sectors and 39% of firms now expected to increase employment over the next 12 months, compared with 25% in the Spring survey. Fewer firms had problems obtaining credit, although overall credit conditions remain tight.

This finding was echoed by the Bank of Canada’s Senior Loan Officer Survey, a separate report released Monday, that showed that business-lending practices of major Canadian financial institutions continued to tighten, although to a lesser extent than in Spring.

In a clear signal that credit conditions continue to improve, the Bank of Canada found demand for its term purchase and resale agreement facility -- an initiative put in place to ease liquidity pressures on financial institutions by buying securities from dealers -- was down for the first time since September last year. The central bank purchased just $2.25-billion worth of securities out of a planned $3-billion.

Derek Holt, the vice president of economics at Scotia Capital warned that businesses may not maintain such a high level of optimism by the time the Bank of Canada’s Autumn survey approaches. He said commodity prices, stock markets and the Canadian dollar had all eased since the survey was taken.

Interest rates also hold the potential to shake up expectations. The Bank of Canada has committed to keeping interest rates on hold through to mid-2010. But Marco Lettieri, an economist at National Bank Financial said the bank may be forced to raise interest rates sooner if inflation rises. He said core inflation at 2% was higher than the central bank had forecast and that service sector price inflation would need to ease along with a further softening in the Canadian to prevent a rise.
For the moment, businesses intentions do not reflect a surge in prices. The number of businesses that expected input and output prices to increase at a faster pace in the coming 12 months inched higher in the central bank’s summer survey, although the vast majority continued to foresee a slow pace of growth.

“Article Sources from: By Alia McMullen, Financial Post July 13, 2009 3:30pm”