By Promit Mukherjee and David Ljunggren
OTTAWA, April 1 (Reuters) - Canadian firms are starting to see conditions improve after almost two years of deterioration but expect demand to stay subdued over the next year, the Bank of Canada (BoC) said on Monday in its first quarter survey.
Fewer firms are planning for a recession in the coming 12 months and the number who expect to see inflation above 3% for the next two years has also fallen. And for the first time in four quarters, firms see future sales increasing.
Analysts and economists say the survey - which contains some of the most recent data on the economy - will help them judge when the Bank of Canada might start cutting interest rates from their current 22-year high of 5%.
The Bank, which has a 2% inflation target, says it might be able to start reducing rates this year but declines to give a timeline. Inflation hit an eight month low of 2.8% in February.
The business outlook indicator - a broad gauge of how firms feel about their prospects - improved to -2.42 in the first quarter from -3.09 in the fourth quarter.
"Firms reported that business conditions improved slightly in the first quarter. The uptick in sentiment follows nearly two years of deterioration and is reported widely across all regions, sectors and firm sizes," said the survey.
Some 27% of firms expect Canada to be in a recession over the next year, down from 38% in the fourth quarter, while 40% thought inflation would stay above 3% for the next two years, down from 54%.
The survey noted fewer firms planned to make unusually large or frequent price increases over the next 12 months.
"Firms reported that demand remains weak overall. But there are some signs of returning optimism," said the survey, citing overall conditions, sales outlooks and employment intentions.
February's inflation data and a rebound in gross domestic product in January are sending mixed signals to the market on how the impact of high rates on the economy.
Wage growth, which the BoC singles out as one reason for sticky inflation, will be slower than it was in the past year, but is still likely to be high. Labor shortages continue to decline, the survey said.
A separate central bank survey of consumer expectations showed Canadians believe inflation has slowed and do not expect more rate hikes this year.
Money markets have trimmed their expectations of a June rate cut to around 64% from 70% last week and are fully pricing in a first 25 basis point cut in July.
The Bank of Canada will release updated projections on April 10 along with the latest interest rate policy decision.
((Reuters Ottawa bureau, david.ljunggren@tr.com))