A rebound for the Canadian economy in the first quarter spilled over to a strong start for Q2, with pressure on companies continuing to ease, according to a pair of reports.
BMO’s index of Canadian business activity — a compilation of 10 monthly indicators and high-frequency data — bounced back in April, climbing 1.0% for the month after registering small declines in both February and March.
“Many of the real-time indicators for the Canadian economy are also highlighting its continued resilience,” BMO said in a research note.
Meanwhile, Statistics Canada’s latest survey of business conditions, carried out from April to early May, signalled that the pressures facing companies have continued to ease in the second quarter.
While the improved conditions are good news for businesses, the economy’s resilience could mean that the Bank of Canada’s inflation fight isn’t over, BMO said.
The economic rebound in April came alongside an upturn in the Canadian housing market, which saw rising home sales and housing starts. However, the evidence was more mixed in other segments of the economy, BMO noted.
For instance, preliminary data points to stronger retail sales but weaker manufacturing shipments amid still-high inflation, it said. Similarly, stronger wholesale trade is being propped up by rising oil prices.
At the same time, the labour market remains tight, with unemployment at record lows and hours worked on the rise.
Overall, the uptick in business conditions last month “bodes well for the start of the second quarter,” BMO said. The Canadian economy is hanging on “despite the numerous headwinds,” which may have implications for monetary policy.
“We still anticipate the economy slowing down in coming quarters as ongoing resilience raises the odds that the Bank of Canada will have to leave the sidelines to bring demand and supply back into balance,” it said.
Statistics Canada said the outlook for business survey respondents is “slightly improved.”
For instance, it reported that 73.5% of businesses said that they are either “very optimistic” or “somewhat optimistic” about the next 12 months, up from 67.5% in the previous quarter.
Businesses in the finance and insurance sector were most likely to be optimistic, it noted.
The share of businesses that expect sales to increase in the next three months is up to 25.9% from 19.1%, the survey found.
And most respondents (53.8%) expect profits to hold up, which is a slight increase from 51.1% in the previous survey.
Additionally, StatsCan noted that, while 22.9% of businesses are expecting continued supply chain issues in the months ahead, this is down from 26.3% in the previous survey.
The increased optimism comes against the backdrop of an array of ongoing challenges, with high inflation remaining the top issue (cited by 56.0% of respondents), followed by the rising cost of inputs — including labour, capital and raw materials (40.3%) — and higher debt costs facing 38.5% of respondents.
“Over the next three months, nearly half of businesses expected their operating expenses to increase,” StatsCan said, adding that almost 30% expect their profitability to decrease, and a similar share expect to increase the prices that they charge.