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Reawakening Optimism: Business Confidence Ascends at Last

Canadian Economics

By: Jake Lenarduzzi

  • In January, The Conference Board of Canada’s Index of Business Confidence rose by 6.2 points to 76.9 (2014 = 100). The rise marks the end of a historic downturn, breaking a trend where the Index had fallen in nine consecutive quarters.
  • • The positive swing was driven by a 9.9 per cent reduction in business executives who believe their financial position will worsen over the next six months, as well as a 9.5 per cent surge in those who believe now is a good time to invest.
  • Although most firms remain pessimistic on the state of the economy, this survey may prove to be a turning point as nearly one quarter of respondents expect overall economic conditions to improve over the next half year, twice the share from our previous survey in the fall.
  • A contributing factor to this greater optimism could be firms’ perspectives on prices, with nearly 70 per cent of survey participants expecting Canadian prices to increase at a rate of 3 per cent or less over the next six months—20 per cent more than our last survey.
  • Another contributing factor could stem from firms’ expectations on borrowing costs, with only 13.7 per cent of executives anticipating an increase in borrowing rates in the coming months, down from 28.5 per cent in October.
  • Artificial intelligence tools are impacting business investment plans, as noted by 30.2 per cent of respondents. Executives continue to emphasize the benefits of AI tools on firm-level productivity through analytics, automation, and decision support.
  • On the flip side, over 60 per cent of businesses said they were operating below their optimal capacity, indicating how capacity utilization rates are an ongoing point of weakness.
  • These survey results align with our Canadian 5-year Outlook, where capital investment levels are forecast to see a modest expansion over the next six months.

Insights

The Index of Business Confidence rose for the first time in over two years. This upturn could be a sign of the clouds starting to clear for firms from an investment standpoint. However, several factors are currently having adverse effects on planned investment expenditures, including high interest rates, rising labour costs, government policies, and shortage of qualified staff. These concerns, each identified by over 40 per cent of survey participants, constitute the primary challenges influencing investment spending at this time.

High interest rates continue to be the foremost concern among Canadian businesses, marking the fourth instance in the last five surveys. Similar to our October survey, approximately 53 per cent of respondents believe that high interest rates are currently negatively impacting their planned expenditures. The Bank of Canada maintained its benchmark interest rate at 5 per cent in January, with the next announcement scheduled in March. While the majority of participants expect their firms’ borrowing rates to remain steady over the next six months, more than 20 per cent anticipate a decrease, supporting our view that interest rate cuts are likely to commence by mid-2024.

Ontario once again retained its status as the preferred destination for planned investment. In each of our last five surveys, over 40 per cent of Canadian business executives identified Ontario as the primary region for their upcoming investment expenditures. Ontario’s share, at 43.6 per cent, is more than 10 per cent higher than anywhere else in Canada, driven by major investments within the automotive sector. Meanwhile, the Prairies have garnered increased attention for investment, particularly in critical mineral exploration projects. With a rich resource base, the Prairies’ current share stands at 29.1 per cent, the second highest in Canada.

For an up-to-date understanding of Canada’s economic state and trends, please see our real-time GrowthNow forecast.

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