Business Outlook Survey—Autumn 2018

Results of the Autumn 2018 Survey | Vol. 15.3 | October 15, 2018

Responses to the autumn Business Outlook Survey indicate that near-term business prospects continue to be robust. Strong demand and elevated capacity pressures support firms’ investment and employment intentions.

Overview

• Building on an improvement in sales over the past 12 months, firms expect sales growth to increase further. Reports of better sales indicators for domestic and foreign customers are widespread.
• Driven by both strong demand and capacity constraints, the investment indicator rebounded to a high level. Hiring intentions have receded but are still positive across all regions and sectors.
• Capacity pressures remain elevated, except in the Prairies. Reports that labour shortages have intensified over the past year have reached near-record levels.
• Input and output prices are expected to grow at a faster pace, with several firms anticipating upward cost pressure from tariffs. A majority of firms continue to expect inflation to be in the upper half of the Bank's inflation-control range.
• Credit conditions were little changed over the past three months.
• The Business Outlook Survey indicator remains at almost record levels, consistent with widely held positive views on most indicators. Note: Interviews were conducted before the announcement of the United States-Mexico-Canada Agreement (USMCA) on September 30.

Firms continue to be optimistic about export demand, with businesses, on balance, expecting foreign sales to grow at a greater rate over the next 12 months. A majority of firms anticipate strong US growth over the next year, frequently attributing it to tax reforms, higher government spending and a strengthening energy sector. While US trade protectionism was cited as a constraint for some firms selling into the United States, most expect to benefit from healthy US household demand and robust US business investment.

After edging down in recent surveys, the balance of opinion on investment intentions rebounded to a high level in the autumn survey (Chart 3). Many firms reported increasing investment spending in response to anticipated strength in demand and capacity pressures (Box 1). Indeed, a majority of businesses—more than in recent surveys—are investing to expand production or improve efficiency, while fewer firms are limiting their upcoming investment spending to maintenance of existing capital. Some firms reporting higher spending intentions are focused on information technology and related investments.

Following a steady increase over several surveys, the balance of opinion on employment intentions receded (Chart 4) but remains positive across all regions and sectors. Firms planning to expand their workforce frequently pointed to anticipated sales growth and are often operating at capacity. Among businesses expecting to reduce staff, the most commonly cited reason was efficiency gains.

The percentage of firms reporting that they would have some or significant difficulty meeting an unexpected increase in demand remains elevated and is concentrated outside the Prairies (Chart 5). Reports of pressures on production capacity are broad-based across sectors and continue to be predominantly related to constraints on labour. Many firms anticipate further increases in capacity pressures, frequently citing difficulties finding new staff and expectations of rising demand.

The balance of opinion on the intensity of labour shortages moved up to a near-record high (Chart 6, red line), pointing to the increasingly widespread view that labour shortages have intensified over the past 12 months. Reports of more intense labour shortages are most pervasive in Quebec and still modest in the Prairies. The share of firms facing labour shortages that restrict their ability to meet demand edged up again and remains just above its historical average (Chart 6, blue bars). Businesses reported most difficulty finding workers for occupations tied to construction, transportation and information technology. Some firms attributed the problem to structural issues such as population aging and changing occupational preferences.

Prices and inflation

As in recent surveys, input prices are expected to grow at a faster pace over the next 12 months, as indicated by the positive balance of opinion (Chart 7). Expectations of increases in input cost growth are most widespread in the goods sector and outside the Prairies. Many businesses reported upward pressure from tariff increases, particularly those on steel and aluminum, and higher prices for various commodities.

The balance of opinion on output prices is unchanged and remains positive (Chart 8), suggesting that output prices are expected to grow at a greater rate over the next 12 months. Several businesses are planning to pass on tariff cost increases to customers. Competition remains the main source of negative price pressure, although to a lesser extent than in recent surveys.

Inflation expectations edged down (Chart 9), but a majority of businesses continue to expect inflation to be in the upper half of the Bank’s inflation-control range over the next two years. Firms reported rising labour costs, strong economic growth and tariff increases as the main reasons for inflationary pressures.

Credit conditions

The balance of opinion on credit conditions is near zero (Chart 10), suggesting little change over the past three months. While most firms indicated that access to credit is easy or relatively easy to obtain, those reporting difficulty were often tied to commodity sectors.

Business Outlook Survey indicator

Following an increase in the summer survey, the Business Outlook Survey indicator remains at almost record levels, consistent with widely held positive views on most indicators (Chart 11).

Box 1: Strong demand and capacity constraints are key drivers of firms’ investment plans

In recent surveys, firms have been asked to explain the factors driving and holding back the level of their investment expenditures over the next 12 months. In the autumn survey, domestic and export demand were most frequently cited as supporting firms’ investment spending, on net (Chart 1-A). Businesses also commonly reported that long-term strategic plans or investment schedules are backing the level of upcoming capital spending (such as long-term expansions, technology strategies, research and development, and scheduled maintenance). Additionally, firms often reported plans to invest because they have reached the limits of their existing productive capacity, or because they need to keep up with competitors. On balance, financing conditions (cost or availability) are favourable for firms’ investment intentions.

Conversely, various regulations and taxes are among the most commonly cited impediments to investment. Firms typically referred to domestic regulations, often related to environmental approvals (including those for future pipeline capacity), as well as lengthy processes for obtaining project approval. Some businesses also noted that uncertainties around domestic conditions (e.g., future pipeline capacity approvals and other regulations) and US trade policy are holding back their capital spending plans. Finally, for several firms, expected investments will be lower following high outlays in the previous year.

The Business Outlook Survey summarizes interviews conducted by the Bank’s regional offices with the senior management of about 100 firms selected in accordance with the composition of the gross domestic product of Canada’s business sector. This survey was conducted from August 23 to September 17, 2018. The balance of opinion can vary between +100 and -100. Percentages may not add to 100 because of rounding. Additional information on the survey and its content is available on the Bank of Canada’s website. The survey results summarize opinions expressed by the respondents and do not necessarily reflect the views of the Bank of Canada.