Results of the Autumn 2020 Survey | Vol. 17.3 | October 19, 2020
With many containment measures related to the COVID‑19 pandemic being lifted, results from the autumn Business Outlook Survey suggest that business sentiment has improved but remains weak across all regions. Businesses expect the pace of the recovery in their sales to slow.
- Interviews for the Business Outlook Survey were conducted from late August to mid-September, when case levels of COVID‑19 were still low.
- The Business Outlook Survey indicator recovered somewhat but remains well below its historical average, signalling weak business sentiment.
- After many containment measures were lifted and business activity resumed over the summer months, firms now expect sales to increase from low levels. There are indications the pace of the recovery will slow and be uneven across industries. Although the majority of firms expect the rebound in their sales to continue, one-third of businesses anticipate their sales will not return to pre-crisis levels within the next 12 months.
- While credit conditions have eased, investment intentions remain weak because of heightened uncertainty and demand that is still below pre-pandemic levels. Hiring plans continue to be modest.
- Slack remains in the economy but has narrowed. With the improvement in demand, the number of firms citing capacity pressures and binding labour shortages has increased. However, the constraints are often not broad-based, and findings from firms specializing in logistics suggest that some limitations may be temporary (Box 1).
- Although firms expect slightly faster input price growth, they anticipate growth in output prices and wages will be limited as demand remains weak. Inflation expectations moved up, but a majority of firms still anticipate inflation will be in the lower half of the Bank of Canada’s inflation-control target range.
Business Outlook Survey indicator
Many of the pandemic containment measures that had been imposed in the spring were lifted over the summer months. Firms reported that demand recovered, and the regional Business Outlook Survey indicator shows that business sentiment improved but remains weak across the country (Chart 1). Although higher than in the summer survey, results for several indicators continue to be below their historical averages. Firms reported that 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.
Chart 1: BOS indicator
* This indicator may differ from the overall Business Outlook Survey (BOS) indicator because the common variations are extracted from more variables. These variables are more volatile because they are based on responses from smaller samples of firms.Last observation:
Similar to results from the summer survey, most businesses reported slower sales growth—and often outright sales declines—in the past 12 months because of negative impacts from the pandemic (Chart 2). With the lifting of many containment measures, firms expect their sales to grow at a greater rate over the next 12 months (Chart 3, blue bars). This largely reflects expected increases in firms’ sales from low levels. Future sales indicators such as order books and sales inquiries are lower than 12 months ago (Chart 3, red line), suggesting that growth in the near term will be weak.
Businesses expect the pace of the recovery in their sales experienced during the summer months to slow. Regarding the return to pre-crisis sales levels, businesses’ expectations fall into three groups, which suggests that the economic recovery will be uneven. One-third of firms reported that their sales were mostly unaffected or positively affected by COVID‑19. A second third of firms indicated that their sales have already fully recovered or will recover within the next 12 months. Most businesses in these two groups are linked to household consumption, residential real estate, natural resources or infrastructure spending. Another third of firms either expect their sales will not return for at least 12 months or are unsure when sales will fully rebound—these firms are lagging in the recovery. These businesses are generally linked to tourism and related industries, where physical distancing is difficult. As in the summer survey, many firms referred to uncertainty about the return of containment measures and the unknown timing of a broadly available vaccine.
Chart 2: Past sales growth
* Percentage of firms reporting faster growth minus the percentage reporting slower growthLast observation:
Chart 3: 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:
Exporters expect their sales to increase in the next 12 months despite a deterioration in indicators of future foreign sales compared with a year ago. But for many firms, those increases are from low levels. Several exporting businesses link their expected increase in sales to improved demand from households in the United States. Still, some exporters do not expect their sales to return to pre-crisis levels within 12 months. These firms are often tied to tourism.
Firms’ investment intentions remain weak. Businesses intend to keep their investment spending on machinery and equipment roughly the same over the next 12 months, as indicated by a balance of opinion near zero (Chart 4). Several firms—predominantly those lagging in the recovery—plan to decrease their spending for reasons tied to the pandemic, including weak demand, cash flow concerns and elevated uncertainty. Businesses with positive investment intentions often referred to strategic spending plans, such as resuming long-term investment projects or pursuing new opportunities created by the pandemic. In contrast to the summer survey, some firms now have capital expenditure plans supported by domestic and foreign demand.
Chart 4: Investment intentions
* Percentage of firms expecting higher investment minus the percentage expecting lower investmentLast observation:
After a tightening in the summer survey, firms reported an easing in credit terms and conditions over the past three months (Chart 5). Several businesses said that, as their sales returned close to pre-pandemic levels, the credit tightening experienced earlier in the pandemic was starting to unwind. For some, more favourable conditions were linked to support from government programs or lender policies focused on improving firms’ cash flows or access to credit. Businesses facing tighter credit conditions most often cited lenders’ decreased risk appetite or were in lagging industries.
Chart 5: 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:
The balance of opinion on employment intentions edged up but remains below its historical average, suggesting modest hiring plans (Chart 6). Some firms whose sales have been positively affected by the pandemic are expanding their workforce to meet an increase in demand. Others are refilling some positions after laying off staff earlier in the pandemic. Still, 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. Nearly half of firms reported that the Canada Emergency Wage Subsidy program has helped them reduce or avoid layoffs or refill positions quickly.
Chart 6: Employment intentions
* Percentage of firms expecting higher levels of employment minus the percentage expecting lower levels Last observation:
Pressures on production capacity
Results for capacity and labour pressures suggest that the economy continues to have excess capacity and labour slack, although these have narrowed since the summer survey. After a collapse in capacity pressures reported in the summer survey, the share of firms that would have difficulty meeting an unanticipated increase in demand moved up to the historical average (Chart 7). Most firms facing constraints suggested that they are not broad-based and may be temporary. Indeed, roughly one-third of firms reporting capacity constraints tied them to the pandemic. For instance, several firms attributed some of the difficulty finding labour to the Canadian Emergency Response Benefit. Other businesses reported that supply chain issues were making it difficult to source certain goods. However, separate consultations with businesses in the logistics industry suggest that these bottlenecks may not persist over the longer term (Box 1).
Chart 7: Capacity pressures
With an improvement in demand since the summer survey, reports of binding labour shortages have increased (Chart 8, blue bars), largely in Central Canada. However, most businesses did not indicate broad-based tightness. For instance, labour shortages were often related to highly skilled positions (e.g., experienced engineers, specialized technicians). The indicator on labour shortage intensity moved up but remains negative, which suggests that labour markets continue to be weaker than 12 months ago (Chart 8, red line).
Chart 8: Labour shortages
* Percentage of firms reporting more intense labour shortages minus the percentage reporting less intense shortagesLast observation:
Wages, prices and inflation
Expectations that wage growth will slow over the next 12 months are widespread, as indicated by a negative balance of opinion (Chart 9).1 Most businesses reporting softer wage growth referred to negative impacts from the pandemic and continued uncertainty. Some firms are freezing wages. Businesses expecting to increase wages at a greater rate compared with the past 12 months are doing so to attract and retain workers.
Firms expect input prices to grow at a slightly faster pace over the next 12 months (Chart 10). Upward pressures are driven by increases in commodity prices, difficulties sourcing various inputs (e.g., home furnishings, food) and higher operating costs associated with health guidelines. Still, some firms reported slower input price growth as they renegotiate contracts with suppliers.
Chart 9: Wage expectations
* Percentage of firms expecting higher labour cost increases minus the percentage expecting lower labour cost increases Last observation:
Chart 10: Input prices
* Percentage of firms expecting greater price increases minus the percentage expecting lesser price increases Last observation:
The balance of opinion on output price growth moved up to zero, suggesting that businesses intend to raise their selling prices at the same rate as over the past 12 months (Chart 11). Positive price pressures are often tied to the pass-through of higher commodity prices or faster growth of input prices linked to disruptions in supply chains. Some firms, but notably fewer than in the summer survey, continue to cite downward pressures due to weak demand caused by the pandemic. Indeed, with demand recovering, some businesses reported a desire to raise prices to pass on higher input costs to customers or to rebuild profit margins.
Chart 11: Output prices
* Percentage of firms expecting greater price increases minus the percentage expecting lesser price increasesLast observation:
After falling dramatically in the summer survey, firms’ inflation expectations rebounded somewhat, but the majority of businesses expect inflation over the next two years to remain in the bottom half of the Bank’s inflation-control target range of 1 to 3 percent (Chart 12). As in the summer survey, expectations are more dispersed than usual across response categories, suggesting elevated uncertainty about the outlook for inflation. Many businesses view weak economic conditions as the main reason for limited inflationary pressures. In contrast, several firms anticipating inflation to be above 2 percent pointed to higher prices due to supply chain disruptions or the eventual consequences of current fiscal and monetary stimulus policies.
Chart 12: Inflation expectations
Box 1: Flexible logistics solutions are helping manage supply chain challenges
To better understand the impact of the pandemic on supply chains and the response of firms that support them, the Bank conducted consultations with a small, targeted sample of Canadian businesses and associations in the logistics industry.2
Supply chain challenges
Most firms reported that their operations were immediately and adversely affected at the onset of the pandemic by:
- changing consumer demands
- temporary closures of customer businesses and suppliers domestically and internationally
- capacity constraints related to transportation, sometimes tied to health guidelines
Overall, many businesses experienced significant slowdowns in sourcing inputs and in finding transportation and warehousing options, among other issues.
Mitigating measures and price pressures
The firms consulted noted that, after the shutdown phase early in the pandemic, they began working closely with suppliers and customers to address these challenges. Some suppliers reduced their number of product lines and focused on producing basic items. Large retailers and wholesalers temporarily sourced products from different suppliers and identified new delivery options. Transportation companies adjusted their capacity and schedules. Firms also mentioned they have started to hold higher inventories as a precaution against further supply chain disruptions. In some regions, this is straining warehouse capacity that was already tight before the pandemic.
These findings provide evidence that logistics-related processes and supply chain networks have been flexible in response to the challenges of the pandemic. This suggests that some of the supply chain issues reported by firms in the Business Outlook Survey may be temporary. Mitigating measures will remain in place indefinitely but are continually being adjusted and are less extensive now than at the onset of the pandemic.
Most businesses indicated additional costs throughout the supply chain tied to personal protective equipment, enhanced cleaning and sanitation, and physical distancing requirements. Retailers also noted increased costs associated with curbside pickup and direct-to-home delivery related to the surge in e‑commerce demand. Most firms indicated they partly pass these costs on to their customers but are limited by competitive pressures.
The evolution of supply chains
Several businesses said having shorter supply chains with localized parts closer to Canada is an ongoing topic of discussion. However, in the near term, most firms do not expect to pivot away from their existing processes or relationships. Nor do they expect to make major changes in their investment strategies. Instead, several firms reported accelerating their adoption of digital technologies in the near term to stay competitive and to help further mitigate some of the pandemic-induced challenges. These technologies will, for example, allow firms to improve their e‑commerce capabilities, enhance data sharing across supply chains and increase automation.
- 1. For more information on this new series, see the Backgrounder on the Business Outlook Survey question on wage growth.[←]
- 2. The sample was composed of 27 firms and industry associations engaged in logistics and in transporting and warehousing goods. Interviews were conducted between August 24 and September 16, 2020.[←]
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 by phone and video conference from August 24 to September 16, 2020. 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.