Small business confidence dropped this month, setting up decreased expectations for Canada’s growth in the third quarter.
Canadian small business confidence decreased almost four percentage points from June’s reading, hitting 57.8 in July, according to the business barometer published monthly by the Canadian Federation of Independent Business (CFIB).
While sentiment improved in May and June, it may have been “too fast to be sustainable,” the barometer report said.
With an index value of 56, Ontario was the main cause of the negative reading, losing almost 7 percentage points month over month.
By industry, big declines in optimism among retailers (−5.4 percentage points) and professionals (−7.4) weighed the sector average down, the report said.
Optimism in most industries remained below long-term norms. However, of the report’s 13 sectors, six showed improved sentiment, including the financial, insurance and real estate sectors (+5.3 percentage points).
And, on a year-over-year basis, July’s reading was slightly higher. “Confidence may have bent, but has not broke,” said a report by TD Economics. “Small businesses (the vast majority of firms in Canada) remain relatively upbeat, despite the risks posed by a slowing external backdrop.”
For example, there was a one-percentage-point decrease in respondents citing “insufficient foreign demand” as limiting their ability to increase sales.
Further, TD noted that confidence levels moved away from near-term lows in Canada’s oil-producing provinces. For example, though Alberta’s index decreased 1.8 percentage points in the month, the index remained near its highest level since early 2018. “This fits with other data showing that Alberta’s economy is gaining some traction,” TD said.
Two provinces had increases in business sentiment. The indices in Manitoba and New Brunswick reached four-point increases to 60.1 and 61.2, respectively, which the barometer report called “modestly healthy.”
Overall business health remained steady, with 41% for respondents continuing to say their firms were in good shape, compared to 14% in poor shape—an increase of one percentage point month over month.
Also stable were wage and price plans, which remained at about 2%, though the TD report said that these measures were both lower than they were in July 2018. And full-time hiring plans showed a decrease, with about 16% of owners expecting to hire staff in the next few months, compared to about 18% in June.
Overall, TD Economics said the drop in confidence suggests “a softer tone for growth to begin the third quarter.”
In its July monetary policy report, the Bank of Canada projected real GDP to be 1.1% year over year in the third quarter, compared to 1.3% in the second. It forecasted GDP of 1.3% for 2019, and 1.9% for 2020—the latter downgraded from the previous projection in April of 2.1%.
Business sentiment and investment in Canada is improving, the central bank said, but geopolitics present uncertainty.
About the CFIB business barometer: Findings are based on 710 responses, received through July 15, to a web survey. Responses were collected from a stratified random sample of CFIB members. Findings are statistically accurate to +/− 3.7% 19 times in 20.