Probably one of the main reasons POG is low these days.
Friday, July 18, 1997
Business confidence hits 20-year high
By BUD JORGENSEN
Economics Reporter The Financial Post
Business confidence is at a 20-year high, and the low-inflation climate is giving a big boost to
consumer sentiment.
Separate reports issued yesterday by the Conference Board of Canada and Statistics Canada
cited the stimulative powers of low interest rates.
u The Conference Board said its business confidence index is at the highest level since it was
started in 1977, and that its consumer confidence index is at an eight-year high - both reflecting a
bullish outlook based on low rates.
u Statistics Canada reported that the annual consumer price inflation rate was a tame 1.8% in
June, and that declining mortgage rates have been a big factor in bringing down inflation.
Business economists see these reports as yet another sign that the economy is in a period of
healthy growth.
The only point being debated is whether the Bank of Canada will raise interest rates soon, fearing
that cheap money now will lead to inflation down the road.
In setting policy, the central bank watches "core inflation," which is defined as the consumer price
index excluding the volatile food and energy components.
Core inflation rose to a 2% annual rate in June from 1.7% in May. The June reading was the
highest since November 1995.
Ted Carmichael, chief economist at J.P. Morgan Securities Canada Inc., said the move up in the
core inflation rate "provides additional rationale" for the Bank of Canada to back away from the
easy money policy that has been in place for more than a year.
The bank increased its overnight loan rate three weeks ago and Carmichael expects another
increase by late summer.
Still, inflation is mild by postwar standards. "Core inflation in Canada has been 3% or lower for 66
months running. This performance is unprecedented in the postwar era," said Nesbit Burns Inc.
chief economist Sherry Cooper.
The inflation record is reflected clearly in the Conference Board surveys, with consumers saying
that now is a good time to spend and business managers saying now is a good time to invest.
The Conference Board's consumer confidence index has gone up for six consecutive quarters,
reaching its highest level since the first quarter of 1989.
The Conference Board report said rising confidence in Ontario accounted for all of the second
quarter increase in the consumer confidence index. The latest survey found that 60% of consumers
believe now is a good time to make a major purchase.
In the business survey, 72% of managers think the financial situations of their firms will improve,
while only 4% see conditions getting worse.
Investment intentions among business managers are strong, and 87% said their businesses are
operating at, or slightly below, optimal capacity.
"Despite high capacity utilization, a slack labor market is keeping inflation expectations stable," the
Conference Board report said.
On the consumer side of the survey, a slack labor market can mean poor job prospects, which
highlights a lingering problem.
"Consumers continue to struggle against poor income flows. In real terms, personal disposable
income rose in only one of the past four quarters, resulting in a cumulative 1% decline of $4 billion,"
the consumer survey report said.
The business survey report suggests that Canadian companies are basing their optimism on more
than the home market.
"Nearly 27% of respondents feel that more attractive opportunities outside of Canada are lowering
domestic investment," the report said.
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