Business Outlook Survey—Spring 2019

Results of the Spring 2019 Survey | Vol. 16.1 | April 15, 2019

Results from the spring Business Outlook Survey point to a moderation from previously high levels of domestic and foreign demand for firms in most regions. Investment and employment intentions remain positive.

Overview

  • Firms’ expectations for sales remain positive but have softened as several businesses are less optimistic about demand. The main headwinds are a more uncertain outlook in the Western Canadian energy sector, continued weakness in housing-related activity in some regions, and tangible impacts from global trade tensions (Box 1). Sales prospects are still solid in Quebec.
  • Investment and employment intentions remain healthy outside the Prairies. Plans to increase capital spending and add staff are most common among firms in the services sector facing sustained demand.
  • The share of businesses reporting capacity pressures has declined to a low level, with some firms pointing to recent additions of capital and labour while others cite a moderation in demand. Indicators of labour shortages have also moved down.
  • Firms anticipate input and output price growth to stabilize, reflecting ongoing competition, rising commodity prices and fading pressure from tariff-related cost increases. Inflation expectations have declined but are still concentrated in the Bank of Canada’s 1 to 3 per cent inflation-control range.
  • Credit conditions eased marginally over the past three months.
  • The Business Outlook Survey indicator decreased from a strongly positive level in the winter survey and is now slightly negative, suggesting a softening in business sentiment.

Business activity

The indicator on past sales growth has moved down to near zero (Chart 1), suggesting that the pace of sales growth has moderated slightly over the past 12 months after a strong year. This also reflects a recent slowing in demand for firms tied to the energy and housing sectors, who expect their sales to remain weak or deteriorate further. Reports of improvements in future sales indicators—such as order books and sales inquiries—compared with a year ago have declined further (Chart 2, red line). Still, over the next 12 months, firms anticipate the rate of sales growth to be marginally faster (Chart 2, blue bars), as indicated by a modestly positive balance of opinion. Positive views on sales continue to be widespread among firms in services industries, particularly information technology and transportation, and in Central Canada.

Chart 1: Past sales growth

a. Percentage of firms reporting faster growth minus the percentage reporting slower growthLast observation:

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 deterioratedLast observation:

Sales prospects abroad remain positive, supported by sustained foreign demand, but global trade headwinds and geopolitical tensions are weighing on exporters’ sales outlook (Box 1). Firms’ expectations for US economic growth, although still positive, have moderated from elevated levels in recent surveys.

Despite some softening in business sentiment, intentions to spend on machinery and equipment remain healthy in most regions and continue to point to an increase in investment over the next 12 months (Chart 3). Plans for higher expenditures are particularly widespread among businesses in the services sector supported by solid, mostly domestic, demand. As in recent surveys, many capital projects are aimed at expanding production capacity or increasing efficiencies. Firms exposed to the energy sector, particularly in the Prairies, cited weaker investment intentions due to uncertainty around pipeline approvals and recently mandated production curtailments.

Chart 3: Investment intentions

* Percentage of firms expecting higher investment minus the percentage expecting lower investmentLast observation:

The balance of opinion on employment intentions is slightly lower (Chart 4) but still positive. Plans to hire continue to be widespread across all regions and are most evident among firms in the services sector. Many businesses intend to add staff to expand capacity or to meet expected increases in demand for their products. Some firms noted that efficiency gains, often through automation and technology, are reducing the need to increase employment.

Chart 4: Employment intentions

* Percentage of firms expecting higher levels of employment minus the percentage expecting lower levels Last observation:

Pressures on production capacity

After several quarters of elevated capacity pressures, the share of firms that would have difficulty meeting an unanticipated increase in demand has moved down to a low level (Chart 5). While pressures eased across all regions and sectors, they continue to be prevalent in Quebec and British Columbia, commonly among businesses that reported strong past sales activity. Labour-related constraints remain the most frequently cited bottleneck. Some firms expect pressures to ease over the next 12 months, most often due to recent or planned hiring and investments, but several respondents also referred to softer demand expectations.

Chart 5: Capacity pressures

  Last observation:

Both indicators of labour shortages have decreased, signalling that pressures on labour markets are less widespread than in the winter survey. While, on balance, firms continue to report labour shortages as more intense compared with 12 months ago (Chart 6, red line), this view is concentrated among businesses in Quebec. In most other regions, the intensity of labour shortages is roughly the same. The share of firms reporting that labour shortages are limiting their ability to meet demand has declined and is below the historical average (Chart 6, blue bars).

Chart 6: Labour shortages

* Percentage of firms reporting more intense labour shortages minus the percentage reporting less intense shortagesLast observation:

Prices and inflation

Businesses expect input price growth to stabilize over the next 12 months, as indicated by a balance of opinion near zero (Chart 7). Respondents reported that commodity prices are the main source of rising price growth. Firms, particularly in the manufacturing sector, expect fading upward pressure associated with tariff-related cost increases—namely those on steel and aluminum.

Chart 7: Input prices

* Percentage of firms expecting greater price increases minus the percentage expecting lesser price increases Last observation:

After several surveys indicating faster growth, the balance of opinion on output prices has turned slightly negative, suggesting that firms expect their selling prices to grow at a marginally slower rate over the next 12 months (Chart 8). Competition remains the main source of negative price pressure.

Chart 8: Output prices

* Percentage of firms expecting greater price increases minus the percentage expecting lesser price increasesLast observation:

Firms’ inflation expectations have declined (Chart 9) but are still concentrated in the Bank’s 1 to 3 per cent inflation-control range. A majority of businesses are now anticipating inflation to be in the lower half of the range over the next two years. These firms often tie their inflation expectations to weakening economic activity. Respondents who expect the consumer price index to be in the 2 to 3 per cent range commonly cited oil prices and tariffs as drivers.

Chart 9: Inflation expectations

Last observation:

Credit conditions

The balance of opinion on terms and conditions for obtaining financing moved back toward an easing (Chart 10); however, most firms continue to report credit conditions as unchanged over the past three months. Some businesses citing better terms and conditions pointed to their own recent strong performance or greater competition among banks. Reports of tightening remain concentrated among firms in the Prairies.

Chart 10: Credit conditions

* Percentage of firms reporting tightened terms and conditions minus the percentage reporting eased. For this question, the balance of opinion excludes firms that responded “not applicable.” Last observation:

Business Outlook Survey indicator

The Business Outlook Survey (BOS) indicator declined from a strongly positive level in the winter survey and is now slightly negative (Chart 11), suggesting a softening in business sentiment. Responses to several BOS survey questions moved below their historical averages.

Chart 11: BOS indicator

Last observation:

Box 1: Global trade headwinds and geopolitical tensions are affecting firms’ operations

Business sentiment softened in the spring survey with several sources of foreign headwinds being reported. Firms’ expectations of US growth remain positive but have moderated from elevated levels in recent surveys (Chart 1-A), with some firms referring to US political uncertainty as well as US–China trade tensions. Against this backdrop, the share of businesses expecting to benefit from US growth continues to edge down.

As in the previous survey, several respondents cited negative impacts on their outlooks from US policy changes and related uncertainty. Some firms reported impediments to their export sales resulting from US protectionism, including ongoing Buy American sentiment and changes to trade policy for dairy products and softwood lumber. Other respondents, particularly in the energy sector, reported that US tax cuts and regulatory differences reduce their competitiveness vis-à-vis US firms. Several firms also noted cost increases due either directly or indirectly to tariffs, notably those on steel and aluminum as well as those associated with Canadian countermeasures. Finally, in the spring survey, some firms noted that the US–China trade dispute weighs indirectly on their business. Overall, respondents citing negative impacts generally have weaker foreign sales expectations, investment intentions and hiring plans than unaffected businesses.

Beyond the United States, some exporters reported that geopolitical tensions between Canada and China as well as other global trade issues are now hurting sales or are a source of uncertainty.

Despite these factors, many businesses point to foreign demand as supporting their sales outlook. Indeed, several firms continue to expect a positive impact on their sales from US growth. A few respondents also noted benefiting from US policy changes (e.g., foreign affiliate operations) as well as diversion of trade to Canada due to US–China trade issues.

Chart 1-A: Firms' expectations of US growth have moderated


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 February 19 to March 13, 2019. 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.