FOREX TRADING

Bank of Canada’s Fourth Quarter 2009 Business Outlook Survey Indicates Improving Credit Conditions

Canada released both its Business Outlook Survey (BOS) and its Senior Loan Officer Survey (SLOS) for 2009′s fourth quarter this morning with the forming pointing to improving credit conditions in the quarter while representing stabilization from previously tight conditions. (The former survey was conducted over the period November 16 to December 11, 2009 while the latter reflected opinions over the period November 30 to December 4, 2009.) The simultaneous release of these two documents provides a read on credit conditions from both the borrowers and the lenders perspective, respectively. For borrowers, the balance of opinion on credit conditions (i.e., tighter less easier conditions) implied that credit conditions improved in fourth quarter after stabilizing in third quarter.

The final quarter of 2009 showed the greatest number of businesses indicating an easing in credit conditions (26%) relative to those who saw conditions tightening (14%) since the second quarter 2007, which represented the quarter prior to the onset of the financial market turmoil. It was noted, however, that the improvement seemed modest in the face of the extent of the earlier deterioration. From the lender’s perspective, conditions appear to be stabilizing after three quarters where credit conditions were reported as continuing tight although easing. Both surveys suggested that the improving credit conditions are more evident for large firms relative to small and medium-sized businesses. This largely reflected large firms’ ability to directly access improving capital markets; however, the Business Outlook Survey also indicated that “access to credit is beginning to ease among firms that borrow from domestic chartered banks as well.”

The Business Outlook Survey also covers a number of other aspects of the economic conditions facing Canadian firms and indicates broad-based improvement. For example, the balance of opinion (i.e., positive responses less negative responses) on future sales over the next 12 months remained high at 50% although this was down slightly from 53% in the third quarter 2009 (Sales activity over the past 12 months continue to reflect the impact of the recession with a reading of -51%, which represented a slight deterioration from the -43% recorded in the third quarter.) Very encouraging to us was the measure for investment in machinery and equipment that jumped to +17% from +3% in the third quarter 2009. Investment activity often lags an overall improvement in economic activity. The measure for hiring intentions showed a marked improvement as well as rising to +41% from +27% over the same period. This augurs well for job growth returning to the positive column after the disappointing December employment report released last Friday.

Today’s report also indicated that a sizeable 81% of respondents feel that inflation over the next two years will remain within the Bank of Canada’s target range of 1% to 3%. This is down marginally from 83% in the third quarter 2009 although the survey indicates that those who saw inflation remaining in the 1% to 2% range jumped to 61% from 49%. (This was offset by the percentage seeing inflation in the range of 2% to 3% falling to 20% from 34%.)

The two Bank of Canada surveys indicate that the credit tightening continues to improve from both a lender’s and borrower’s perspective. This augurs well for the recovery to be sustained going into 2010 after tentative indications of a return to positive growth over the second half of 2009. However, this improvement is still being felt more by large than small and medium-sized business. As well, as noted in the Business Outlook Survey survey, the extent of the improvement seems modest compared to the extent of deterioration throughout the recession. These factors should keep the Bank of Canada cautious about withdrawing the extent of monetary ease currently in the system. We expect that the central bank will adhere to its conditional commitment of leaving the overnight rate at 0.25% through the end of the second quarter 2010.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group 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.