The Bank of Canada Business Outlook Survey (BOS) reported elevated optimism among Canadian businesses in the fourth quarter of 2021. The BOS indicator, a statistical summary of survey results, was 5.99 in 2021Q4, up from 4.56 in the third quarter. Businesses expected foreign and domestic demand to strengthen, boosting future sales. That said, the survey was taken before the impact of Omicron was fully felt across the country, suggesting an upside bias in survey responses.
- Interestingly, today’s report noted that capacity pressures are lifting the overall BOS indicator. In fact, since the beginning of 2021, they have explained most of the increase in the indicator. In the past, capacity constraints were reflective of strong demand, but in the current context, it represents both strong demand and supply disruptions.
Indeed, prior to the Omicron shock, strong demand and growing capacity constraints were leading firms to signal increased investment intentions. According to the BOS, “positive investment intentions are broad-based across sectors and regions”. Some firms were planning on proceeding with plans that were delayed by the pandemic. In addition, “intense labour shortages and difficulties attracting and retaining workers” were leading to some businesses to increase expenditure on digital technologies and automation.
On the topic of labour shortages, the BOS reported that four in 10 firms see labour shortages as holding back sales. As a result, some companies said it may take longer than previously anticipated to fully recover. According to firms, there were three main factors contributing to labour market tightness: strong labour demand, structural impediments such as aging population and technological changes requiring new skills, and increased worker preference for remote work and flexible working hours.
In terms of labour demand, intentions to hire in the next 12 months rose and remain widespread across industries. Three-quarters of businesses reported that employment levels were back to pre-pandemic norms, and many are hiring to meet higher domestic and foreign demand. This has put upward pressure on wages, with 57% of respondents stating they intend to raise wages at a faster rate over the next year.
Firms expect to pass on higher wages, as well as higher input prices stemming from supply constraints, to Canadians, with many expecting to do so over the next six months. Given that, two-thirds of businesses anticipate consumer price inflation will be above 3% for next two years. In a special question included in this BOS, most companies said they expected inflationary pressures to “dissipate over time, with inflation returning close to target in one to three years.”
Key Implications
Today’s BOS results were a bit outdated as the survey was taken before Omicron burst onto the scene. Indeed, from October to early-December, businesses were fairly upbeat as COVID cases were relatively low and the economy continued to make solid gains. This boosted investment intentions and left some firms ready to restart investment plans that were shelved due to the pandemic.
Omicron, however, has upended the economic landscape captured in the Business Outlook Survey. With cases skyrocketing and provinces renewing public health restrictions, spending plans could again be shifted to the backburner as businesses wait out this wave of the pandemic, repeating their behaviour during previous waves. As a result, advances in non-residential could be muted in the near-term, keeping expenditure below pre-pandemic levels in the fourth quarter of last year and the first quarter of 2021.
BOS results are likely to be a key input in the Bank’s next monetary policy announcement later this month. Last quarter’s survey reported that businesses see price pressures receding over the medium term. This will alleviate some of the Bank’s concerns around an upward shift in inflation expectations. However, the BOS also reported a tight labour market and rising wage pressures, which could keep inflation elevated for longer. The Bank will have to weigh these risks alongside the Omicron impact as it charts the next steps for monetary policy.
