RBC ECONOMICS RESEARCH – DAILY ECONOMIC UPDATE – January 10, 2011 Bank of Canada’s Business Outlook Survey indicates optimism about growth continuing albeit at a modest pace The Bank of Canada released both its Business Outlook Survey (BOS) and its Senior Loan Officer Survey (SLOS) for the fourth quarter of 2010. The BOS survey indicated continued optimism about the growth being sustained albeit at a modest pace. Credit conditions from a borrower’s perspective indicated continued improvement. From a lender’s perspective, as reflected in the SLOS survey, the picture of credit availability has improved as well with the improvement spreading among a greater number of borrowers. (The BOS survey was conducted during the period of November 15 to December 10, 2010 while the SLOS survey reflected opinions during the period of December 6 to 10, 2010.)

The simultaneous release of the BOS and SLOS surveys provided a reading on credit conditions from both the borrowers and the lenders perspective, respectively. The two surveys suggested generally improving credit conditions although with more broad-based gains implied by the SLOS survey. The BOS survey showed that 22% of respondents felt credit conditions had eased although this is lower than the 27% in third-quarter survey; however, this still offset the 8% of those who felt conditions had tightened down from 11% last quarter. Thus, the diffusion measure (the difference between those seeing tighter less easier conditions) remained negative 14 yet down from -16 in the third-quarter survey. This measure has been in negative territory since the third quarter of 2009, which coincides with the cessation of the Canadian recession.

Similarly, the diffusion measure from the SLOS survey on business-lending practices remained negative as well (i.e., credit conditions eased) dropping to -36.4 in the fourth quarter from -22.3 in the third quarter. The Bank of Canada commented that the improvement in lending conditions was becoming more widespread among borrowers. This observation was most evident for small borrowers where conditions eased in the fourth quarter after remaining unchanged in the third quarter. Conditions eased for the second consecutive quarter for commercial borrowers and the sixth consecutive quarter for corporate borrowers.

The BOS also covers a number of other aspects of the economic conditions facing Canadian firms. Of greatest encouragement was the jump in the diffusion measure for hiring intentions for the next 12 months (the difference between the percentages of respondents indicating higher compared to lower hiring), which jumped to 41 in the fourth quarter from 25 in the third quarter. The diffusion measure for investing in machinery and equipment for the next 12 months stayed high in the fourth quarter at 29 although this is down from 36 in the third quarter. The balance of opinion for future sales for the next 12 months stayed solidly positive but moderated to 22 from 29 during the same period. The measure for past sales was slightly more upbeat with the diffusion measure rising to 30 in the fourth quarter from 22 in the third quarter.

On the inflation front, the BOS indicated expectations skewed toward output prices rising at a greater rate of 38% relative to 15% who saw output prices increasing at a lesser rate. The difference of 23 percentage points is down from 29 in the third quarter. The survey indicated that 91% of respondents expected inflation to be within the Bank of Canada’s target range of 1% to 3%. This range compares to 85% in the third quarter reflecting mainly a drop in those respondents seeing inflation below 1% (2% in fourth quarter compared to 7% in the third quarter) rather than above 3% (3% in fourth quarter compared to 5% in the third quarter). This result suggests some easing in deflationary concerns from already moderate levels.

The BOS survey indicates continued optimism that the recovery will be sustained. Such is being facilitated by an easing in lending conditions that was confirmed in the surveys from both a borrower and a lender’s perspective; however, growth is being restrained by “strong competition and moderate demand”. Because of these headwinds, the Bank of Canada is expected to keep monetary conditions accommodative in the near term. Today’s surveys reinforce our expectation that a return to tightening mode will be delayed until the second quarter of 2011

Paul Ferley, Assistant Chief Economist, RBC Economics To view the economic data calendars with trend charts, go to: http://www.rbc.com/economics/html_calendars/ca/calendar.html (Canada) http://www.rbc.com/economics/html_calendars/us/calendar.html (United States)

The statements and statistics contained herein have been prepared by the RBC Economics Research based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.