The worsening of business sentiment is in part due to uncertainty about the direction of the global economy. While politicians and policymakers are trying to get companies to invest, investment intentions are falling.
In a statement
the Bank of Canada said:
"Firms are generally more circumspect about near-term investment decisions and are focusing on minimizing costs."
Although exports are recovering from the recent recession, the European debt crisis and slow recovery in the U.S.are leading Canadian businesses to hold off on new investment. The bank survey was of senior managers from almost one hundred firms.
Of those surveyed, only 37% reported that they intended to invest more on machinery and equipment over the next year, while 29% said they expected to spend less. The difference between the two figures was still positive at 8 but was far below the second quarter figure of 24. The governor of the Bank of Canada, Mark Carney, has criticized Canadian companies for being too cautious and not investing the hordes of cash many companies have on their books.
Although companies expect to hire more staff next year, the hiring rate will be much less than that predicted in the second quarter. Around 95% of managers expect inflation to be within the 1 to 3 percent range regarded as acceptable by the Bank of Canada. More think that the rate will be in the bottom half of the range than in the second quarter survey.
Canada's high debt-to-income ratio
remains one of the biggest domestic threats to the Canadian economy. New data show that the ratio rose in the second quarter from 161.8% in the first calculation to 163.4% in the revised figures. The revisions were made to bring Statscan methodology in line with new international standards. The figure for the first quarter, using the older methodology, was 152.0%. The debt ratio is key to measuring the vulnerability of households to financial shocks, such as sudden increases in interest rates. The Canadian ratio is higher than that in the U.S. even though the Canadian economy weathered the recent recession better than the U.S.
This high debt ratio may indicate reduced demand in the near future as households try to cut back on purchases to keep their debt load under control. Fortunately, there is no sign of interest rates increasing much, if at all, in the near future. However, authorities have warned Canadians about taking on even more debt while the rates are low.