Bank of Canada sees weak business sentiment
Business sentiment in Canada improved over the summer but remains near historical lows as uncertainty around the path of the virus curbs demand and sales prospects, according to the Bank of Canada.
The results from the autumn Business Outlook Survey show businesses report conditions have improved as warmer weather and lower Covid-19 case counts encouraged consumers to go out and buy goods and services. However, businesses are still worried about future demand and sales prospects with some economic restrictions still in place.
“Firms reported their sales prospects are limited by weak demand and precautionary health guidelines, and that their investment and hiring plans remain Modest due to elevated uncertainty,” the central bank said in the survey, which took place between Aug. 24 and Sept. 16.
The tone of the survey is consistent with the Bank of Canada’s view that a full recovery will be long and difficult. The economy rebounded more quickly than expected in the summer as containment measures were lifted but the second phase of the recovery -- known as the “recuperation” phase -- will be uneven and protracted.
The composite gauge of sentiment rose to -2.2 in the third quarter, from a decade-low of -6.9 last quarter. While that’s a substantial improvement, the reading is still the second-lowest since 2016.
Although the survey was completed recently, economic conditions have changed as Covid-19 cases rapidly rose, particularly in the country’s two largest provinces. Ontario and Quebec reimposed containment measures on some businesses and activity in recent weeks in response to the second wave which will keep a lid on demand and hamper economic activity through the fall and winter.
- Recovery remains uneven across industries: One third of firms reported sales were mostly unaffected or positively affected by COVID‑19; a second third of firms indicated sales have already fully recovered or will recover within the next 12 months; final third either expect their sales won’t return for at least 12 months or are unsure when sales will fully rebound
- Businesses that say sales won’t recover within a year typically linked to tourism and related industries where physical distancing is difficult
- Meanwhile, businesses linked to real estate, infrastructure and natural resources have largely recovered or see themselves recovering within a year
- Capacity constraints appear to be back to historical averages, but the central bank says most firms facing constraints see them as temporary or not broad-based
- Despite the rebound in the capacity gauge, BOC concludes: “Results for capacity and labor pressures suggest that the economy continues to have excess capacity and labor slack, although these have narrowed since the summer survey”
- Investment intentions improved from previous quarter, but remain weak -- below historical averages
- Employment intentions have also rebounded, though they remain slightly below historical averages. It’s an uneven trend. “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”
- Wage growth is expected to slow, the survey found
- Firms expect input prices to grow at a slightly faster pace over the next 12 months, driven by increases in commodity prices, difficulty sourcing inputs, or higher operating costs due to health guidelines
- Businesses have slightly higher inflation expectations, with 11 per cent of firms expecting inflation above 3 per cent
--With assistance from Erik Hertzberg.