Small- and medium sized enterprise (SME) sentiment continued its recovery, increasing 6.7 points to 61.3 in July.
Although the headline is more in line with its historical average, other measures are nowhere near their normal levels due to the unique characteristics of the pandemic’s economic shock.
Some possible reasons for the high index score could be that many business owners have a much lower expectation of how “good” performance will look 12 months out, resulting in the index temporarily overshooting, as well as a survivor effect with many of the weaker businesses polled pre-pandemic no longer replying in July.
SME SENTIMENT RECOVERS WHILE OTHER MEASURES REMAIN WEAK
The Canadian Federation of Independent Business’ (CFIB) monthly Business Barometer Index increased to 61.3 in July, more in line with its historical average (chart 1). SME sentiment is normally a leading indicator of economic activity, supporting what looks to be a bounce back in Q3 (chart 2) barring any setbacks in the coming months. As governments begin to lift more restrictions, the durability of the recovery will depend on how successful the general population remains at keeping the virus at bay.
Provincial business sentiment continues to improve, with 8 out of 10 provinces now above the 50 point threshold (chart 3). Ontario posted the strongest gain in July, increasing 12.0 points to 66.0. Quebec SME sentiment increased slightly to 39.6 but remains the most pessimistic province.
Similar to the provinces, sentiment by industry continues to improve with 10 out of 13 industries also breaking the 50 point threshold (chart 4). Professional and business services was the most optimistic industry in July but, not surprisingly, retail sales had the largest single month gain, increasing 11.3 points to 62.0 as restrictions were increasingly eased across jurisdictions. Also not surprisingly, sentiment remained weak in agriculture and natural resources, two of the harder hits industries during the pandemic.
General business indicators, though improving, remain depressed compared to historical levels. The view of the general business situation improved slightly in July (chart 5), as did the average capacity utilization rate (chart 6). However, full-time staffing plans continue to remain low (chart 7) as insufficient domestic demand remains the top concern for business owners (chart 8), casting doubt on the speed of a future recovery in labour markets. Possible reasons for the difference between the headline index level and other measures could be that business owners have lowered their expectations for what is considered as “good” performance 12 months out as well as a survivor effect with many of the weaker businesses polled pre-pandemic no longer replying to the survey in July. This could lead to a temporary overshoot profile in the index during the recovery.
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