The Bank of Canada Business Outlook Survey (BOS) showed a further improvement in business sentiment in the third quarter of 2021. The BOS indicator, a statistical summary of survey results, increased from 3.96 to 4.73 in 2021Q3. Businesses expect domestic and foreign demand to continue strengthening, and, as a result, they plan on investing more in labour and capital over the next year. The survey results also noted that “heightened capacity constraints, including labour shortages” also contributed to the elevated level of the BOS indicator.
Firms are seeing a broad-based improvement in demand relative to a year ago. Businesses that were most impacted by the pandemic had the strongest positive outlook as provinces lifted many public health measures through the summer. The Delta variant, however, was a source of uncertainty. Firms operating in the housing and consumer goods industry continued to have a positive outlook, but those with record sales over the last year expected some deceleration.
Businesses are concerned that supply issues, such as supply chain disruptions and labour shortages, will limit domestic and export sales. Firms mentioned that shipping delays and the impact of COVID-19 in trading partners were making it difficult to obtain raw materials and goods for sales. Supply chains disruptions are expected to continue until the second half of 2022, longer than what firms had previously thought. On labour shortages, businesses saw three main reasons for this issue: one, pandemic-induced factors (i.e. travel restrictions and government income support), two, structural factors that existed before the pandemic (i.e. demographic/technological shifts), and three, cyclical factors (i.e. strong demand for labour).
Firms are responding to capacity pressures through a combination of strategies, which include focusing on key clients or reducing the hours they are open to consumers. They are also adjusting internal work processes and supply chains. A significant number of firms also said they would be adjusting workers’ compensation.
Compared to the previous two surveys, more firms said they would invest more in machinery and equipment in the third quarter release. The survey results showed that investment intentions broadened across sectors with digital technologies remaining a key plan in investment plans. On the employment end, hiring intentions remained at record-highs, supported by stronger sales expectations. For some businesses, these plans have been constrained by labour availability.
Given labour shortages, more firms reported that they planned to increase wages to attract and retain workers. They also said they planned to raise selling prices due to increased labour costs. On the whole, “businesses continue to anticipate elevated growth in input and output prices in the next year”. Beyond the next 12 months, firms said they expected to return to pre-pandemic pricing behavior. Notably, inflation expectations among businesses increased in this survey. Almost half of businesses expected inflation to be above 3 percent over the next two years as a result of supply chain issues, fiscal and monetary stimulus, and recent increases in food and energy prices.
Key Implications
Businesses grew more optimistic in the third quarter as provinces lifted many public health measures over the summer. With demand improving, firms expected strong gains in sales especially those that were worst impacted by the pandemic.
But businesses are increasingly concerned that they may not be able to service the solid bounce back in demand due to capacity constraints. Supply chain disruptions are limiting production and the restocking of inventories, while labour shortages are leading to a reduction in operating hours for some businesses. If not resolved, these factors could weaken the pace of Canada’s economic recovery.
Businesses are not expecting supply chain issues to fade anytime soon. Labour shortages could also last for some time, due to mismatches between labour supply and demand. This is likely to lead to higher prices, and firms are recognizing that. Today’s survey results showed almost half of surveyed firms expected inflation to be above 3% over the next two years. This was a 10 percentage point increase from the survey in the second quarter. The Bank of Canada will have to pay close attention to these developments as it gears up for the next week’s monetary policy decision.
