(Adds survey material on sales, inflation, credit conditions; reaction)
By Randall Palmer
OTTAWA, July 7 (Reuters) - Fewer Canadian firms expect to have difficulty meeting a surge in demand than did in the first quarter, the Bank of Canada said on Monday in a sign that pressures on production capacity are lessening rather than building.
The central bank's quarterly Business Outlook Survey said overall business sentiment was little changed in the second quarter, with expectations for sales growth remaining positive and continued indications that business export sentiment is gradually firming.
On production capacity, however, it said: "The pickup in sales activity anticipated in recent surveys has been slow to materialize, and firms have been making shorter-term investments to better utilize and upgrade their existing capital."
The number of companies that predicted difficulty in meeting unanticipated demand fell to 34 percent from 45 percent in the first quarter. The Bank of Canada watches the output gap closely for any signs that inflation may be building.
The survey also reported little change in the percentage of companies facing labor shortages, 22 percent in the second quarter.
Businesses expect further U.S. economic strengthening, it said, "and some businesses note that the lagged effects of the depreciation of the Canadian dollar are also supporting sales expectations".
It said companies selling domestically remain hopeful that sales growth will improve but that competition remains challenging "and many firms have yet to see signs of a notable and sustained strengthening in demand".
Inflation expectations remain well-anchored, with 95 percent of respondents saying it will stay within the Bank of Canada's target range of 1 to 3 percent, and the majority of them seeing it in the lower half of the range.
Businesses marked a shift in their expectation for input prices, with the balance of opinion now seeing prices rising at a slower pace as upward pressure from the lower Canadian dollar gradually dissipates.
"Overall, a softer set of readings from the Bank of Canada's survey will be seen as providing some support for maintaining its dovish stance, more critical these days given the runup we've seen in recent core CPI (consumer price index) figures," said Avery Shenfeld at CIBC World Markets.
Businesses also saw credit as easy or relatively easy to get, a sentiment echoed in a separate Bank of Canada survey of senior loan officers, which reported further easing in business-lending conditions. (Editing by Peter Galloway)