Canadian business confidence increases for the first time since May 2015

The CFIB business barometer rose markedly, to 58.9 in October, after being on the decline for the most part of the year. This is the index's first significant improvement since March 2015 and suggests that businesses are now feeling more optimistic about their performance in the coming months. However, today's reading is still indicative of an economy growing below its potential

From a sectoral perspective, the gain in confidence was not broad-based. The increase can be attributed to the construction (+5.6 points to 61.0), agriculture (+3.5 points to 54.9), manufacturing (+1.5 points to 60.2), and transportation sectors (+0.5 point to 59.0). The remaining industries all recorded lower levels of business sentiment over the month, with the most significant declines occurring among firms in information and recreation services (-3.5 points to 61.9), as well as health and education services (-2.7 points to 58.6).

Across regions, business sentiment improved in the majority of provinces, most notably in Manitoba (+6.6 points to 60.6) and Nova Scotia (+4.3 points to 68.0). Optimism also edged higher in energy-rich provinces of Newfoundland and Labrador (+3.5 points to 65.0), and in Alberta (+2.1 points to 36.1) for the first time in a year. The index level also remained broadly in line with the national average in regions where confidence retreated, namely in P.E.I (-0.6 point to 59.4), New Brunswick (-2.4 points to 59.0), Saskatchewan (-1.6 points to 58.3), and Quebec (-2.4 points to 57.1).

The appreciation in business sentiment reflected in today's numbers is most welcome after several months of consecutive declines. While this is not enough to recover the ground lost so far in 2015, it bodes well for Q4 2015 with real GDP growth expected to come in at around 2.3% (annualized).

This breath of optimism could also be related to the Canadian Federal elections won by the Liberal party, led by Justin Trudeau. Indeed, during the campaign, the leading parties all promised to reduce the small business tax rate from the current 11% to 9% in 2019.

"On the other hand, with the Liberal win, small businesses have to factor in lower reductions of EI premiums than previously announced (-12% versus -21% under the Budget published in April 2015). However, the biggest challenge will probably be the expansion of the core CPP that the future government will strive to negotiate with provinces. This measure, which could be considered as an additional tax for small businesses, should be at the heart of the debate in the near future", notes TD Economics.