Business Outlook Survey—Autumn 2020

Results of the Autumn 2020 Survey | Vol. 17.3 | October 19, 2020

With many containment measures related to the COVID‑19 pandemic being lifted, results from the autumn Business Outlook Survey suggest that business sentiment has improved but remains weak across all regions. Businesses expect the pace of the recovery in their sales to slow.

Overview

• Interviews for the Business Outlook Survey were conducted from late August to mid-September, when case levels of COVID‑19 were still low.
• The Business Outlook Survey indicator recovered somewhat but remains well below its historical average, signalling weak business sentiment.
• After many containment measures were lifted and business activity resumed over the summer months, firms now expect sales to increase from low levels. There are indications the pace of the recovery will slow and be uneven across industries. Although the majority of firms expect the rebound in their sales to continue, one-third of businesses anticipate their sales will not return to pre-crisis levels within the next 12 months.
• While credit conditions have eased, investment intentions remain weak because of heightened uncertainty and demand that is still below pre-pandemic levels. Hiring plans continue to be modest.
• Slack remains in the economy but has narrowed. With the improvement in demand, the number of firms citing capacity pressures and binding labour shortages has increased. However, the constraints are often not broad-based, and findings from firms specializing in logistics suggest that some limitations may be temporary (Box 1).
• Although firms expect slightly faster input price growth, they anticipate growth in output prices and wages will be limited as demand remains weak. Inflation expectations moved up, but a majority of firms still anticipate inflation will be in the lower half of the Bank of Canada’s inflation-control target range.

Exporters expect their sales to increase in the next 12 months despite a deterioration in indicators of future foreign sales compared with a year ago. But for many firms, those increases are from low levels. Several exporting businesses link their expected increase in sales to improved demand from households in the United States. Still, some exporters do not expect their sales to return to pre-crisis levels within 12 months. These firms are often tied to tourism.

Firms’ investment intentions remain weak. Businesses intend to keep their investment spending on machinery and equipment roughly the same over the next 12 months, as indicated by a balance of opinion near zero (Chart 4). Several firms—predominantly those lagging in the recovery—plan to decrease their spending for reasons tied to the pandemic, including weak demand, cash flow concerns and elevated uncertainty. Businesses with positive investment intentions often referred to strategic spending plans, such as resuming long-term investment projects or pursuing new opportunities created by the pandemic. In contrast to the summer survey, some firms now have capital expenditure plans supported by domestic and foreign demand.

After a tightening in the summer survey, firms reported an easing in credit terms and conditions over the past three months (Chart 5). Several businesses said that, as their sales returned close to pre-pandemic levels, the credit tightening experienced earlier in the pandemic was starting to unwind. For some, more favourable conditions were linked to support from government programs or lender policies focused on improving firms’ cash flows or access to credit. Businesses facing tighter credit conditions most often cited lenders’ decreased risk appetite or were in lagging industries.

The balance of opinion on employment intentions edged up but remains below its historical average, suggesting modest hiring plans (Chart 6). Some firms whose sales have been positively affected by the pandemic are expanding their workforce to meet an increase in demand. Others are refilling some positions after laying off staff earlier in the pandemic. Still, almost one-third of businesses—generally those that are dependent on tourism or facing weak demand—expect their workforce levels to remain lower than before the pandemic for at least the next 12 months or to never fully return. Nearly half of firms reported that the Canada Emergency Wage Subsidy program has helped them reduce or avoid layoffs or refill positions quickly.

With an improvement in demand since the summer survey, reports of binding labour shortages have increased (Chart 8, blue bars), largely in Central Canada. However, most businesses did not indicate broad-based tightness. For instance, labour shortages were often related to highly skilled positions (e.g., experienced engineers, specialized technicians). The indicator on labour shortage intensity moved up but remains negative, which suggests that labour markets continue to be weaker than 12 months ago (Chart 8, red line).

The balance of opinion on output price growth moved up to zero, suggesting that businesses intend to raise their selling prices at the same rate as over the past 12 months (Chart 11). Positive price pressures are often tied to the pass-through of higher commodity prices or faster growth of input prices linked to disruptions in supply chains. Some firms, but notably fewer than in the summer survey, continue to cite downward pressures due to weak demand caused by the pandemic. Indeed, with demand recovering, some businesses reported a desire to raise prices to pass on higher input costs to customers or to rebuild profit margins.

After falling dramatically in the summer survey, firms’ inflation expectations rebounded somewhat, but the majority of businesses expect inflation over the next two years to remain in the bottom half of the Bank’s inflation-control target range of 1 to 3 percent (Chart 12). As in the summer survey, expectations are more dispersed than usual across response categories, suggesting elevated uncertainty about the outlook for inflation. Many businesses view weak economic conditions as the main reason for limited inflationary pressures. In contrast, several firms anticipating inflation to be above 2 percent pointed to higher prices due to supply chain disruptions or the eventual consequences of current fiscal and monetary stimulus policies.

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 by phone and video conference from August 24 to September 16, 2020. 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.