Ottawa, ON — Confidence among business leaders remained strong in the first quarter of 2006, according to the Conference Board of Canada, and its Index of Business Confidence maintained almost all the gains made at the end of 2005.
Falling a modest 1.2 points from the previous quarter to 146.0, the index now stands a full 10 points higher than one year ago. This continued strength reflects optimism among respondents regarding the financial position of their firms and robust near-term investment intentions. Though the index is still 5 points shy of its recent peak in the third quarter of 2004, business leaders seem to have adjusted to the new realities of a strong Canadian dollar and elevated commodity prices, and overcome the multitude of concerns that arose in response to hurricanes in the United States last summer. The survey was completed over a three-week period in March and April, 2006. The results are published in the Board’s Index of Business Confidence Spring 2006 report.
Most respondents were upbeat about financial prospects for their firms, with 50% expecting their situation to improve over the next six months. This is down slightly from last quarter, but so too are the number of negative responses. With only 6.5% of respondents believing their firm’s financial position will worsen, the balance of opinion on this question rose by 2.2 points to 43.5%. In addition, 46.8% of respondents expect their firm’s profitability to improve over the next six months, while only 10.5% expect it to worsen.
This optimism is supported by the strong state of corporate balance sheets, with corporate profit growth far outpacing expectations over 2005 and currently at a record high level as a share of national income.
Investment intentions remain robust, buoyed by tight industrial capacity, rising labour costs and optimism about profits. Asked whether the present is a good time to invest in plant or equipment, 56.5% of those surveyed responded positively. Responses to this question match those in the final quarter of 2005, and are well above the 2005 average of 50.2%. Overall, with only 16.1% feeling this to be a bad time to invest, the balance of opinion on this question is 40.4 percentage points into positive territory. This signals a continuation of the strong capital investment observed over the past 12 months.
The percentage of respondents that believe economic conditions within Canada will improve over the next six months edged up to 27.4% — the highest positive response to this question since the overall index peaked in the third quarter of 2004. However, the balance of opinion fell by 1%, with those expecting conditions to worsen also increasing to 13.7%. Thus, while overall sentiment remains positive, an increasing number of business leaders are pessimistic about the near-term direction of the Canadian economy.
When asked what factors are adversely affecting the level of their investment, survey respondents cited the appreciation of the Canadian dollar most frequently, up 11% to 26.6%. Also of note are high interest rates; while this is one of the least frequent responses, at 11.3%, high interest rates were not on the radar at all as recently as the third quarter of 2005. Though Canadian monetary policy remains slightly accommodative by historical standards, the Bank of Canada’s recent tightening has been noticed by business leaders, and it is becoming a concern when investment decisions are made.
For more information, contact the Conference Board of Canada at 1-866-711-2262 or visit www.conferenceboard.ca.