By Promit Mukherjee and David Ljunggren
OTTAWA, Jan 20 (Reuters) - Canadian firms see improved demand and sales in the coming year, largely fueled by rate cuts, but are concerned about the potential damage from promised U.S. policies, the Bank of Canada said on Monday.
The Bank's fourth quarter business outlook survey said overall business sentiment remained subdued. The survey is closely watched by the BoC as it gives a perspective on investment and hiring intentions of companies.
The business outlook indicator - a metric of prospects under current economic conditions - improved to -1.18, its best standing in the last five quarters but continued to be below average.
Only 15% of firms are now planning for a recession in Canada over the coming year, down from 16% in the third quarter, it said.
"After a period of weak demand, firms expect their sales growth to improve over the coming year. This expectation is largely driven by recent interest rate reductions and the anticipation of further cuts ahead," it said.
The outlook was carried out from Nov 7-27, before the bank's most recent 50 basis point cut on Dec 11. U.S. President Donald Trump promised on Nov 25 to impose a 25% tariff on all Canadian imports when he took office.
A separate online poll of business leaders the central bank carried out in December showed widespread uncertainty about the potential fallout of U.S. policies, with 40% of respondents saying they expected the effects to be negative.
The bank has cut rates by a total of 175 basis points since June in a bid to spark a weak economy and counter rising unemployment. Rates had hit a two-decade high of 5% before the bank started easing policy.
"Firms' intentions to increase investment over the coming year have become more widespread and are well above their historical average," the BoC said in the survey.
But it cautioned that uncertainty linked to the U.S. trade policy was holding back companies from committing investments, although the energy sector was likely an exception.
Companies reported that over the next 12 months they anticipate their selling prices will grow but improved demand conditions will allow them to pass through the cost increases and restore margins.
The survey noted that a larger-than-normal share of firms plan keep employment levels roughly flat over the coming year. However, they also do not see need to reduce staff.
Canada's economy added nearly four times the number of jobs forecast in December and reached its highest number in almost two years, But unemployment has continued to be at historically high levels.
(Reuters Ottawa editorial)