Results of the Summer 2018 Survey | Vol. 15.2 | June 29, 2018
Supported by expectations of sustained demand, responses to the summer Business Outlook Survey point to continued business optimism, particularly outside the energy-producing regions. In this context, firms reported increasing pressures on capacity and prices.
- Despite some expectations of a moderation in the pace of sales growth, firms’ sales outlooks remain robust, supported by strong foreign and domestic demand, and improvements in some commodity prices.
- Investment intentions, while slightly weaker, are still buoyant, driven by sustained demand and intensifying capacity pressures. The employment indicator continues to trend upward, pointing to broad-based hiring plans across the country.
- Reports of pressures on production capacity and labour shortages are increasingly common, mostly outside the energy-producing regions.
- Businesses across all regions and sectors continue to expect faster input price inflation. With favourable demand conditions in some regions, more firms are in a position to pass cost pressures through to output prices. Inflation expectations rose again, but remain concentrated within the Bank’s inflation-control range.
- Most firms reported no change in credit conditions.
- The Business Outlook Survey indicator moved up to near-record levels, in line with widespread business optimism. Note: Almost all interviews were conducted before the announcement of tariffs on steel and aluminum imports from Canada by the US administration on May 31.
The balance of opinion on past sales growth increased in the summer survey, to its highest level since 2012, driven by healthy domestic and foreign activity and a continued recovery in the energy sector (Chart 1). As several firms, particularly domestically oriented firms, including those tied to housing in some regions, expect a moderation in sales growth, the balance of opinion on future sales growth receded (Chart 2, blue bars). It is now marginally positive, indicating that firms expect little change in the pace of sales growth over the next 12 months. Yet reports of better indicators of future sales, such as order books and sales inquiries, are widespread across all regions (Chart 2, red line). Firms that are optimistic about their sales prospects often expect to benefit from sustained foreign or domestic demand, improving commodity prices, or new products or initiatives to increase market share.
Chart 1: Past sales growth
* Percentage of firms reporting faster growth minus the percentage reporting slower growth
Chart 2: Future sales growth
* Percentage of firms expecting faster growth minus the percentage expecting slower growth
** Percentage of firms reporting that indicators have improved minus the percentage reporting that indicators have deteriorated
In particular, firms serving foreign customers reported that orders have improved compared with 12 months ago, and they expect export sales to increase at a greater rate over the next year. Firms generally anticipate strong growth in the US economy, often tying their expectations to US corporate tax cuts and favourable US labour markets. Indeed, many businesses, including those supplying to the energy and construction sectors, expect a positive impact on their sales from US economic growth. However, several firms cited headwinds, such as capacity constraints (including labour shortages), competition and trade barriers, that are limiting their export sales prospects.
Fewer firms than in the spring survey are planning to increase investment in machinery and equipment, but intentions remain buoyant (Chart 3). Higher investment plans are concentrated among firms with an improving sales outlook and intensifying capacity pressures, and are more prevalent in the services sector. Several firms, often exporters, plan to reduce spending, having recently completed significant projects. Businesses frequently reported that the regulatory environment is negatively affecting their investment plans.
Chart 3: Investment intentions
* Percentage of firms expecting higher investment minus the percentage expecting lower investment
The indicator of employment intentions continues to trend upward (Chart 4) and points to widespread plans among firms to increase, generally modestly, their workforces over the next 12 months. Hiring plans, often driven by expected sales growth, remain broad-based across all regions and sectors but are particularly common among service firms. Several firms, primarily in British Columbia and Quebec, reported that labour shortages are limiting hiring.
Chart 4: Employment intentions
* Percentage of firms expecting higher levels of employment minus the percentage expecting lower levels
Pressures on production capacity
The indicator of capacity pressures moved back up, with the number of firms citing significant difficulties meeting an unanticipated increase in demand reaching levels not seen since before the 2008–09 recession (Chart 5). However, constraints remain modest in the energy-producing regions (Box 1). Pressures continue to be largely labour-related and are more pervasive among goods-producing firms. Businesses anticipate some further constraints ahead in meeting demand, often referring to expectations of stronger sales activity and increasing difficulties finding staff.
Chart 5: Capacity pressures
The labour shortage indicators point to tighter labour markets. The number of firms citing labour shortages that restrict their ability to meet demand rose to a level just above the historical average (Chart 6, blue bars). Reports of labour shortages are most prevalent in British Columbia but are also common in Central Canada. Some firms with binding shortages expect to raise wages in response. For the fifth consecutive quarter, firms reported that, on balance, labour shortages are more intense than they were 12 months ago (Chart 6, red line).
Chart 6: Labour shortages
* Percentage of firms reporting more intense labour shortages minus the percentage reporting less intense shortages
Prices and inflation
For the third consecutive quarter, the balance of opinion on input prices is positive (Chart 7), with expectations of faster cost growth broad-based across all regions and sectors. Several firms reported upward pressures from non-commodity inputs, including rising subcontracting costs often linked to construction. Businesses also expect prices for some commodities to increase at a greater rate.
Chart 7: Input prices
* Percentage of firms expecting greater price increases minus the percentage expecting lesser price increases
Firms expect their output prices to increase at a greater rate over the next 12 months than over the past 12 months, as indicated by the positive balance of opinion (Chart 8). Some businesses, frequently in British Columbia and Quebec, noted that firmer demand conditions will allow them to pass on to their customers higher input costs related to commodities, labour and various non-labour inputs. Competition continues to be the main factor limiting firms’ ability to raise prices.
Chart 8: Output prices
* Percentage of firms expecting greater price increases minus the percentage expecting lesser price increases
After a pickup in the spring survey, inflation expectations moved up again but remain within the Bank’s 1 to 3 per cent inflation-control range (Chart 9). A majority of firms expect CPI inflation to be in the upper half of the range over the next two years, often attributing greater inflationary pressures to recent rises in oil prices and labour-related costs (including minimum wage increases).
Chart 9: Inflation expectations
While the balance of opinion is slightly negative (Chart 10), pointing to a marginal easing in credit conditions over the past three months, the majority of firms view the terms and conditions for obtaining financing as unchanged. In general, most businesses described credit as easy or relatively easy to obtain.
Chart 10: Credit conditions
* Percentage of firms reporting tightened minus the percentage reporting eased. For this question, the balance of opinion excludes firms that responded “not applicable.”
Business Outlook Survey indicator
In the summer survey, the Business Outlook Survey indicator increased to near-record levels (Chart 11), signalling widespread business optimism. Responses to most survey questions were above their historical averages, which contributed to the high level of the indicator.
Chart 11: BOS indicator
Box 1: Rising capacity pressures are driven by an upward trend in labour-related constraints
To better understand the nature of firms’ capacity pressures (indicator shown in Chart 5), businesses anticipating some or significant difficulties meeting an unexpected increase in demand are asked to identify the most important obstacles. Since this question was introduced in the winter 2004–05 survey, constraints most frequently cited by firms have been the following: a fully utilized labour force; limits on physical capacity (e.g., equipment, space limitations); and an inability to find new labour at the current wage (Chart 1-A). Other, less commonly reported constraints have included raw material shortages; and regulatory, transportation and logistics bottlenecks.
Chart 1-A: Reports of labour-related bottlenecks are at or near record-high levels
The share of firms reporting physical capacity constraints has trended up slowly since the 2008–09 recession. Reports of labour-related constraints have been more cyclical, declining during the recession and again in 2015 following the downturn in the energy sector. Since the summer 2017 survey, reports of capacity constraints have increased, predominantly those related to staffing, which reached high levels in this survey. Unlike in previous periods of elevated capacity pressures, firms in the energy-producing regions are playing a more limited role. Constraints are now concentrated in British Columbia and Central Canada (Chart 1-B), where businesses face strong demand conditions.
Chart 1-B: Capacity pressures are concentrated outside the energy-producing regions
Many of those citing a fully utilized labour force as their main bottleneck are responding by adding staff. Others reported that labour-related pressures are pushing them to raise wages to better attract and retain employees. Several firms with physical capacity constraints reported intentions to increase investment spending on machinery and equipment, and buildings.
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 May 3 to June 5, 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.