Results of the third-quarter 2022 survey | Vol. 19.3 | October 17, 2022
Business confidence has softened, according to results from the third-quarter 2022 Business Outlook Survey and the July through October 2022 Business Leaders’ Pulse surveys. Many firms expect slower sales growth as interest rates rise and demand growth shifts closer to pre-pandemic levels. Early signs suggest that pressures on prices and wages have started to ease, but firms’ inflation expectations remain high.
Overview
- Businesses expect their price increases to moderate due to downward pressure on prices for commodities and other input goods. They also expect their wage increases to soften from high levels. Firms’ short-term inflation expectations remain above the Bank of Canada’s inflation target.
- Firms’ sales outlooks have softened. Businesses with sales linked to housing activity and household consumption expect weaker sales growth due to rising interest rates. Other firms anticipate their sales growth will be healthy but slower than earlier in the economic recovery from the COVID‑19 pandemic. Amid emerging signs of moderating growth in demand, firms’ plans to invest more and hire eased slightly from previously high levels.
Business confidence has softened but is still positive
Results from the Business Leaders’ Pulse (BLP) show that business sentiment remains positive but has trended down since April (Chart 1). The Business Outlook Survey (BOS) indicator also declined this quarter (Chart 2), with results for several survey questions moving down from elevated levels. Part of the decrease in business confidence reflects a moderation in firms’ sales outlooks. Some businesses linked to housing activity expect higher interest rates to hurt their sales. After experiencing a sharp recovery from the pandemic, other firms now anticipate a slower—although still healthy—pace of sales growth.
Chart 1: Business sentiment is trending down
| April 2022 | 67% |
| May 2022 | 56% |
| June 2022 | 47% |
| July 2022 | 58% |
| August 2022 | 49% |
| October 2022 | 25% |
Chart 2: The BOS indicator has declined
Short-term inflation expectations have edged down but remain elevated
Firms’ expectations for inflation over the short term eased this quarter but remain above the Bank’s inflation target (Chart 3). Businesses continue to link inflationary pressures to:
- global factors
- elevated commodity prices often tied to the ongoing war in Ukraine
- persistent supply chain issues
- domestic influences
- strong demand
- high labour costs
Firms’ expectations for long-term inflation are much closer to target and have been stable for the past few quarters. Most businesses that expect inflation to be substantially above 2% anticipate that it will return to target within three years. They mentioned various conditions necessary for inflation to return to target:
- higher interest rates
- lower commodity prices, which some associated with an end of the war in Ukraine
- improved supply chains
Chart 3: Firms’ short-term inflation expectations continue to be high
Businesses expect their input prices and selling prices to grow at a slower rate than over the past 12 months (Chart 4 and Box 1). They link expectations of slower growth in input and output prices to downward pressure on prices for commodities and other input goods, including those affected by supply chain disruptions (Chart 5). For businesses with sales linked to housing and household consumption, softer demand due to rising interest rates is also limiting their expected increases in output prices. Firms anticipate stable price pressures from costs for services, such as transportation and freight. Several firms expect upward pressure on their output prices as they continue to pass on higher labour costs to their customers.
Chart 4: Businesses expect growth in their input and output prices to slow
Chart 5: Labour costs remain a source of upward pressure on firms’ output price expectations
| 2021Q2 | 2021Q3 | 2021Q4 | 2022Q1 | 2022Q2 | 2022Q3 | Average† | |
|---|---|---|---|---|---|---|---|
| Labour cost pass-through | 7 | 13 | 19 | 35 | 28 | 22 | 7.3 |
| Non-labour cost pass-through | 19 | 14 | 30 | 20 | 16 | -5 | 8.1 |
| Commodity price pass-through | 15 | 7 | 3 | 8 | 3 | -18 | 5.3 |
| Competitive environment | -18 | -4 | -2 | -1 | -11 | -8 | -10.1 |
| Service cost pass-through | 11 | 18 | 17 | 22 | 21 | -2 | 14.5 |
Box 1: Firms’ price-setting behaviour returns to pre-pandemic approaches
During the recovery from the pandemic, many businesses changed their price-setting behaviour in response to an environment with:
- elevated cost growth
- strong demand
- widespread supply constraints
Because businesses and their competitors faced similar supply chain difficulties, the lack of choice made customers more willing to accept higher prices. Firms’ ability to pass on higher costs to their customers increased. Under these conditions, firms made price changes that were larger and more frequent than usual. As in pre-pandemic periods, businesses set prices based mainly on their own costs and competitive conditions—not on past or expected inflation. In other words, during the recovery, firms’ inflation expectations—even when elevated—did not play a major role in their pricing decisions.
In the third quarter, most businesses that adjusted their price-setting practices have already returned to or will soon return to their pre-pandemic behaviour, including:
- changing prices infrequently
- waiting for signs of concrete cost increases
- paying close attention to competitors’ prices
Still, some firms anticipate that unusual price setting will continue until supply chain and inventory issues are resolved.
Firms’ average expected wage increase has receded (Chart 6). Many businesses, but fewer than in recent quarters, are planning faster wage growth to attract and retain workers or to adjust their pay to the rising cost of living. Nearly half of firms do not expect abnormally high wage growth to last beyond the next 12 months as demand slows due to rising interest rates and as supply chain disruptions ease.
Chart 6: Firms’ average expected wage increase has declined
Capacity pressures are still high but show early signs of easing
Pressures on businesses’ production capacity are still high. Firms’ main bottlenecks remain related to labour constraints and supply chain issues (Chart 7). However, survey results provide early signals that capacity pressures are becoming less severe:
- For the first time in the past five quarters, businesses reported that their supply chains had improved compared with three months ago.
- Several firms—more than in recent quarters—noted an easing in labour market tightness. They described seeing a decline in competition for labour, including less poaching, compared with 12 months ago.
Chart 7: Labour and supply chain bottlenecks may have peaked
Firms expect sales growth to slow
Businesses anticipate that their sales will grow at a slower pace over the next 12 months (Chart 8, blue bars). Furthermore, a greater number of firms than in the last survey reported that their future sales indicators (e.g., order books, sales inquiries) have worsened compared with a year ago (Chart 8, red line). Businesses with sales directly or indirectly linked to housing activity and household consumption anticipate weaker sales growth due to interest rate increases. This is consistent with results from the Canadian Survey of Consumer Expectations—individuals, especially those with higher levels of debt, reported they are being negatively affected by rising interest rates. Other BOS respondents, including those tied to hard-to-distance services, expect their sales growth to remain healthy but to moderate to a more normal rate after the period of exceptional strength they recently experienced. Firms linked to commodities or technology continue to have a positive sales outlook.
Chart 8: Many firms reported deterioration in their indicators of future sales
Most BLP respondents think the probability of a recession in Canada in the next 12 months is at least 50% (Chart 9). While many firms anticipate a recession, those not linked to housing activity and other household consumption do not expect it to have a large impact on demand for their products or services. When asked what would trigger a recession, business leaders indicated that large increases in interest rates and high prices reducing consumption would be the most likely factors (Chart 10).
Chart 9: Most businesses think a recession is likely
| Less than 30% chance | 21% |
| 30% to 50% chance | 18% |
| 50% to 80% chance | 35% |
| 80% to 100% chance | 23% |
| Don't know | 3% |
Chart 10: Firms see rising interest rates and high prices as main triggers of a recession
| Interest rates increasing substantially | 73% |
| High prices affecting consumer’ capacity to spend | 69% |
| Loss of confidence in the economy | 47% |
| Wages not keeping up with inflation | 43% |
| Insufficient household savings to support consumer demand | 33% |
| Falling house prices | 27% |
| Labour market weakening | 14% |
Strength in investment and hiring plans eased slightly
Firms’ investment intentions remained positive but moderated for a third consecutive quarter (Chart 11). Plans to invest more are concentrated among businesses facing capacity constraints. These firms intend to invest in technology and automation to increase their production capacity—particularly in the context of elevated labour shortages. Businesses’ plans to increase their capital expenditures also remain supported by their long-term investment intentions and healthy demand for their products and services. Meanwhile, with rising interest rates and signs of softer demand, some other businesses that do not need to expand their capacity are investing about the same as in the past 12 months.
Amid healthy demand and capacity constraints, BOS participants reported that increasing investment costs and further expected interest rate hikes are not yet holding back their investment plans. However, BLP results suggest some uncertainty around this sentiment. In July, two out of every five BLP respondents indicated they would delay or reduce some investment if borrowing costs were to increase by two percentage points.
Chart 11: Businesses with capacity pressures have solid investment plans
The number of businesses planning to hire has declined from high levels. A growing minority of firms, including those tied to housing activity, report that they plan to keep the size of their workforce stable over the next 12 months due to signs of weaker demand. Most other firms intend to hire—their plans continue to be supported by ongoing strong demand. However, some of these businesses noted that their hiring plans may be constrained by difficulties finding labour, particularly for skilled workers (e.g., information technology, engineering and trades).
Endnotes
The Business Outlook Survey summarizes interviews conducted by the Bank’s regional offices with the senior management of about 100 firms selected to reflect the composition of the gross domestic product of Canada’s business sector. This survey was conducted by phone, video conference and in-person interviews from August 15 to September 9, 2022. 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.