Business Outlook Survey—Second Quarter of 2024

Results of the second-quarter 2024 survey | Vol. 21.2 | July 15, 2024

The Business Outlook Survey was conducted by in-person, video and phone interviews from May 9 to 29, 2024. The Business Leaders’ Pulse is conducted online every month; this report presents results from April, May and June 2024.

Overview

• Firms’ sales outlooks are mostly unchanged from last quarter and remain more pessimistic than average. Businesses tied to discretionary spending reported particularly weak sales expectations, while those tied to essential spending see population growth continuing to benefit their sales.
• Investment spending plans also remain below average. Weak demand, elevated interest rates, uncertainty about the business environment and the high cost of machinery and equipment were cited as discouraging investment. In this context, investment spending has become increasingly concentrated on upkeep and repair rather than expansion or improvements in productivity.
• The share of firms reporting labour shortages is near survey lows. Still, few firms plan to reduce headcounts. Businesses attribute easing labour market conditions to a weaker economy and to rapid population growth.
• Businesses expect the growth of their input prices and selling prices to slow, suggesting that inflation will continue to decline over the coming year. Most firms that made abnormally large price increases in the past 12 months do not plan to do so again in the coming year.
• Firms’ expectations for inflation fell in June and are now in the Bank of Canada’s inflation-control range.

Business conditions remain subdued

After recovering from the lows seen in late 2023, business sentiment remained relatively flat in the second quarter of 2024 (Chart 1). When discussing factors weighing on business sentiment, firms mentioned:

• elevated interest rates
• weak demand, particularly for non-essential goods and services
• ongoing high costs

At the same time, though, the share of firms planning for a recession in Canada in the coming 12 months continued to decline (Chart 2).

Chart 2: Fewer firms are planning for a recession

Uncertainty and cost pressures remain firms’ most frequently mentioned concerns (Chart 3). The sources of uncertainty noted most often were domestic factors, such as economic growth, costs, interest rates and tax policies. This uncertainty is contributing to businesses’ modest investment plans.

The share of firms citing taxes and regulation as one of their top concerns increased sharply this quarter. Firms mentioned red tape and regulations as slowing their plans, and taxes, predominantly the carbon tax, as increasing their costs.

Meanwhile, capacity pressures—namely labour shortages and supply chain challenges—have continued to decline in importance over the past two years. And for the first time since the start of 2023, demand has become less of a concern.

Sales growth expectations are still weak

Firms reported below-average sales growth over the past 12 months and continue to expect soft demand going forward. Businesses’ indicators of future sales (e.g., order books, advance bookings, sales inquiries) are largely unchanged over the past four quarters, with the balance of opinion remaining historically low (Chart 4, red line). Further, on balance, firms expect no change in the pace of their sales growth (Chart 4, blue bars). At the time of the survey (before the Bank reduced the policy interest rate on June 5), businesses said they see interest rate cuts ahead—a view increasingly widespread among firms. Most said they expect rates to decline by 0.5–1.0 percentage points in the next 12 months. But they noted they still see the interest rate environment as weighing on their sales outlooks.

Against the backdrop of weak demand, firms’ capacity pressures eased and returned close to their historical average (Chart 6). Only a small share of firms said they are currently experiencing significant difficulties. Easing labour shortages are widespread. Reports of supply chain bottlenecks continue to decline, although firms still noted some challenges. Most often, lingering supply issues are related to long lead times and shortages of inputs, and firms usually characterize the impacts of these issues as minor. Few firms mentioned concerns about shipping disruptions.

Firms’ intentions to invest in machinery and equipment ticked up but are still below their historical average (Chart 7, blue line). Repairing and replacing existing capital equipment rather than investing in new capacity or products to improve productivity remains the primary motivation behind investment spending. The main factors weighing on firms’ investment plans are:

• uncertainty about the economy and business conditions
• taxes and regulations
• the cost of capital goods and financing

In addition, fewer firms than usual see demand conditions as supporting investment. Given their expectations for modest sales growth, firms characterize the return on their investment as uncertain. In some cases, businesses are waiting to see improvements in their sales before investing. Some firms reported that investments related to digitalization (including artificial intelligence) and green initiatives are contributing to their investment spending. But spending on these projects tends to be small.

Given this widespread easing in the labour market, firms’ expectations for wage increases in the next 12 months have softened. The average expected wage increase in the next 12 months has declined significantly (Chart 9, red line). An increasing share of firms expect the pace of wage growth to slow in the next 12 months (Chart 9, blue bars). On balance, firms no longer see a need for higher wages to attract or retain workers. Notably, firms see less pressure on wages from:

• cost-of-living increases
• a need to raise wages to match the market wage

Moreover, firms said their own performance and profitability continues to be a constraint on their wage increases. Still, the average wage point estimate is slightly above its historical average as new union contracts come into effect and some pass-through of previous cost-of-living increases continues.

The share of firms planning larger-than-normal price increases remains well below its 2023 average, and more firms expect to keep prices flat. In the second quarter, the share of firms planning to make larger-than-normal price increases edged up (Chart 11, yellow bars). This remains considerably lower than the share of firms that made abnormally large price increases over the past 12 months (Chart 11, blue bars). A roughly stable share of firms reported they are making unusually frequent price increases.

Firms’ inflation expectations are inside the Bank’s inflation-control range. In the Business Outlook Survey, firms’ expectations for inflation over the next two years are roughly unchanged in the second quarter (Chart 12, red line). However, recent Business Leaders’ Pulse results show monthly expectations for inflation one year ahead fell sharply in June after increasing earlier in the quarter (Chart 12, blue line). Businesses noted that the following factors played a key role in their expectations for inflation:

• monetary policy, which they continue to cite as putting downward pressure on inflation
• demand, which was long seen as keeping inflation elevated, is now seen as weighing negatively on inflation

In contrast, fiscal policy and housing continue to be seen as fuelling inflation and driving some firms’ uncertainty about when inflation will return to the Bank’s 2% target. That said, most respondents expect inflation to return close to the target within two to three years.