Business Outlook Survey—Autumn 2019

Results of the Autumn 2019 Survey | Vol. 16.3 | October 22, 2019

Results from the autumn Business Outlook Survey indicate that business sentiment improved slightly, but regional differences are more pronounced. Positive views in Central Canada contrast with widespread weakness in the Prairies.

Overview

  • Indicators of future sales suggest moderate sales growth ahead. Sales expectations are positive in most regions, notably in Quebec, but are soft in the Prairies. Foreign demand continues to support export sales prospects, though they are being weighed down by trade tensions.
  • Investment and hiring plans are healthy, mainly outside the energy-producing regions.
  • The share of firms reporting pressures on production capacity and the share reporting labour shortages are at somewhat elevated levels. These firms are concentrated in Central Canada and British Columbia.
  • Input price growth is expected to soften modestly due to less pressure from various commodity-related inputs. Nevertheless, firms anticipate output prices will grow at a slightly greater rate than over the past 12 months. As in recent surveys, a majority of businesses expect inflation to be in the lower half of the Bank of Canada’s inflation-control range.
  • Firms reported a marginal easing in credit conditions over the past three months.
  • Although below the high levels reached in 2017 and 2018, the Business Outlook Survey indicator moved up, signalling a slight improvement in overall business sentiment.

Business activity

The balance of opinion on past sales growth continues to be just below zero, which suggests a marginally slower pace of sales growth in the past 12 months compared with the previous 12 months (Chart 1). The weakness in past sales was most common in the Prairies and is expected to persist as challenges in the energy sector spill over to other sectors in the region. Consequently, the overall balance of opinion on the indicators of future sales is at a subdued level (Chart 2, red line), which suggests moderate sales growth ahead. Still, sales prospects are positive for businesses outside the Prairies, particularly those in Quebec. Immigration and strong activity in the information technology and non-residential construction industries are expected to support sales. The balance of opinion on future sales growth is positive (Chart 2, blue bars), as respondents expect sales to increase at a greater rate over the next 12 months. However, for several businesses, often those tied to the energy sector, positive expectations reflect that they anticipate their sales will no longer fall or will recover slightly.

Chart 1: Past sales growth

* 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:

Forward-looking indicators of foreign sales are slightly positive, suggesting modest export sales growth in the next 12 months. Expectations are backed by demand from the United States and the rest of world and by the level of the Canadian dollar. Firms’ expectations of US economic growth have, however, weakened somewhat; several businesses refer to adverse impacts from US–China trade tensions. Some respondents now expect a small US recession over the next 12 months. In this context, a number of firms anticipate their sales will be directly or indirectly negatively affected by slower US economic activity.

The balance of opinion on investment in machinery and equipment has moved up and suggests that capital spending plans remain healthy (Chart 3). Plans to invest more in the next 12 months are widespread outside the Prairies. Firms frequently mentioned strategic investments in technology, automation and software systems as well as capital spending plans to support demand growth. However, several businesses, many of them in the Prairies, reported that regulation, uncertainty and their balance sheet position are holding back their investment plans. Investment intentions are modest among exporters.

Chart 3: Investment intentions

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

Businesses in Central Canada and British Columbia reported robust intentions to expand their workforces. These plans are usually focused on accommodating higher demand or easing labour-related capacity pressures. However, the overall balance of opinion on employment intentions has trended down to just below the historical average (Chart 4), driven by limited plans to hire in the energy-producing regions. Firms anticipating staff reductions often reported soft demand or a focus on increasing efficiency (such as through automation).

Chart 4: Employment intentions

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

Pressures on production capacity

The share of firms that would have difficulty meeting an unanticipated increase in demand moved up again to a somewhat elevated level (Chart 5). Capacity pressures are most common in Central Canada and British Columbia and are frequently tied to labour-related constraints. As in recent surveys, the number of firms reporting physical capacity as an obstacle to meeting an unexpected increase in demand is at a low level. Businesses anticipate capacity pressures will increase over the next 12 months. Most respondents attribute such tightening to further labour constraints and, to a lesser extent, increasing demand.

Chart 5: Capacity pressures

  Last observation:

The indicators of labour shortages point to tighter labour markets in most regions except the Prairies, where slack remains. The share of firms reporting binding labour shortages moved up again to just above its historical average (Chart 6, blue bars). Shortages are most evident for skilled trades. There are also difficulties finding labour for occupations related to information technology due to competition for these workers. Some respondents linked labour shortages to an aging workforce, changing worker preferences and difficulties attracting workers in rural areas.

The indicator of labour shortage intensity has also increased but remains well below the high levels reached in 2018 (Chart 6, red line). Reports of more intense labour shortages are concentrated among service sector firms.

Chart 6: Labour shortages

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

Prices and inflation

While a majority of firms anticipate the prices of their inputs will grow at the same rate as over the past 12 months, the balance of opinion is modestly negative, suggesting that non-labour cost growth is expected to slow slightly (Chart 7). Several firms are expecting less pressure from commodity-related inputs (e.g., steel, fish). Positive cost pressures are attributed to various non-commodity inputs (e.g., subcontractor prices).

Chart 7: Input prices

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

As indicated by a balance of opinion just above zero, marginally more firms expect to increase their selling prices at a greater rate over the next 12 months (Chart 8). Several businesses expecting a faster pace of increases in output prices cited plans to pass higher labour and non-commodity input costs on to their customers. Other respondents signalled intentions to raise their prices at a greater rate after a lull in price growth. Some firms reporting negative price pressure referred to weak demand.

Chart 8: Output prices

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

The majority of businesses still anticipate inflation will be in the lower half of the Bank’s 1 to 3 percent inflation-control range over the next two years (Chart 9). Some businesses point to recent inflation trends and slow economic growth as reasons. Conversely, firms in Quebec generally anticipate inflation will be 2 to 3 percent. They attribute their expectations to rising labour costs, often in the context of strong regional economic activity.

Chart 9: Inflation expectations

Last observation:

Credit conditions

Most businesses continue to report no change in credit conditions over the past three months. However, the balance of opinion on credit conditions is again slightly negative (Chart 10), indicating that terms and conditions for obtaining financing have eased marginally. Firms often attributed the easing to competition among banks. Reports of tighter credit conditions come predominantly from 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 moved up (Chart 11),1 consistent with a slight improvement in overall business sentiment. However, it remains below the high levels reached in 2017 and 2018. Results for most BOS questions are at levels somewhat higher than their historical average. A similar summary measure based on survey responses by region is used to gauge regional sentiment (Box 1).

Chart 11: BOS indicator

Last observation:

Box 1: The regional BOS indicator is slightly positive: widespread positive sentiment in Central Canada contrasts with weakness in the Prairies

The Business Outlook Survey (BOS) indicator is a summary measure that captures common movements from the main BOS questions.2 A variant of the BOS indicator (Chart 1-A, black line) relies on the same BOS questions but at the regional level; thus, the number of variables used in the summary measure is multiplied by five.3 This allows separating the aggregate indicator into regional components, where contributions to the indicator can be associated with the level of business sentiment in each region. The indicator is above zero when business confidence is above its historical average.

In 2019, sentiment has been uneven across the regions as compared with 2017 and 2018, when positive sentiment was broad-based. Results in the autumn 2019 survey suggest widespread business confidence among firms in Quebec and, to a lesser extent, Ontario, consistent with a positive contribution to the regional indicator. Several firms, mostly in these provinces, refer to strength in domestic demand (often linked to immigration, information technology and non-residential construction). In both British Columbia and Atlantic Canada, with responses to most BOS questions at modest levels, the overall level of business confidence is close to those regions’ historical averages. In these regions, there are pockets of softness, such as housing-related demand in British Columbia and weak underlying demand in Newfoundland and Labrador. In the Prairies, due to ongoing challenges in the energy sector, overall sentiment is negative. The responses to most indicators of business activity, capacity pressures and prices for firms in the Prairies have deteriorated to low levels in this survey.

Chart 1-A: In 2019, business sentiment has been uneven across the regions

  1. 1. The BOS indicator now also includes the balance of opinion for indicators of future sales for a total of 12 series. Consequently, the data used for the BOS indicator start in 2003. Despite these changes, the level of the indicator is roughly the same.[]
  2. 2. For a technical discussion of the indicator and an assessment of its forecasting performance, see L. Pichette and L. Rennison, “Extracting Information from the Business Outlook Survey: A Principal-Component Approach,” Bank of Canada Review (Autumn 2011): 21–28.[]
  3. 3. This indicator may differ from the overall aggregate BOS indicator above (Chart 11) because the common variations are extracted from more variables, which are more volatile since they are based on responses from smaller samples of firms.[]

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 August 20 to September 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.