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Following a Step Forward, Business Confidence Retracts

Canadian Economics

By: Jake Lenarduzzi

  • The Conference Board of Canada’s Index of Business Confidence fell by 3.6 points in April to 73.3 (2014 = 100), marking a minor retreat following last quarter’s upturn, which saw the Index rise for the first time in over two years.
  • The main contributors to this decline were a 3.3-percentage point drop in respondents who believe now is an opportune time for business investment, and a 2.9-percentage point drop in respondents who expect their firms’ financial positioning to improve in the coming months.
  • One determinant influencing firms’ investment decisions is their operational status relative to optimal capacity. Currently, 65.3 per cent of businesses are operating below capacity, indicating that there is no urgent need to expand facilities or add to existing machinery and equipment.
  • Despite the retraction, executives maintained their overall economic outlook compared to January’s survey, suggesting that the Index’s decline may not signal another prolonged period of pessimism.
  • On a brighter note, businesses remained optimistic about prices, with nearly 70 per cent of respondents anticipating Canadian prices to rise at an annual rate of 3 per cent or less over the next six months.
  • Ontario once again maintained its position as the preferred destination for planned investment, as indicated by 46.6 per cent of respondents. In each of the last six surveys, Ontario has held a share above 40 per cent.
  • The impact of artificial intelligence (AI) tools on investment plans was acknowledged by 31.4 per cent of executives—the highest share to date. AI’s ability to create a more efficient workplace by streamlining operations and automating repetitive tasks was emphasized in this survey.
  • Contrary to the Index’s fall, more than 75 per cent of respondents expect their capital expenditures to either increase or remain steady over the next six months. This is consistent with our Canadian 5-Year Outlook, which forecasts a modest expansion in capital investment levels during the same period.

Key insights

  • The Index’s rebound was short-lived. After falling in nine consecutive quarters, the Index of Business Confidence finally rose in January, marking the end to a historic downturn. However, this ascent proved to be transient, as evidenced by the latest 3.6-point decline. High interest rates, government policies, and rising labour costs are the biggest factors impeding planned investment.
  • High interest rates remain the top concern for Canadian businesses, but its share has fallen in each of the last three surveys. Currently, 48.6 per cent of firms believe that high interest rates are negatively affecting their planned investment expenditures. This share, while still the highest compared to other factors, dipped below 50 per cent for the first time since the third quarter of 2022. Similarly, the proportion of firms anticipating an upcoming decrease in their borrowing rates has steadily grown over the past year, presently sitting at 27.1 per cent.
  • The new capital gains regime has significant implications for business investment. The 2024 federal budget introduced a change to the capital gains taxation structure by increasing the corporate capital gains inclusion rate from 50 to 66.7 per cent. This measure is expected to have multifaceted effects on the economy, adding a layer of uncertainty to business investment decisions. Not only does the new regime cloud investment intentions, but it also comes at a time where Canada needs productive capital enhancements. Our Budget 2024 Analysis shares more detail on the matter.

For current insights on Canada’s economic state and trends, please refer to our real-time GrowthNow forecast.

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