Business Outlook Survey―Third Quarter of 2021

Results of the third-quarter survey | Vol. 18.3 | October 18, 2021

Firms anticipate stronger demand as pandemic conditions improve, according to results from the Business Outlook Survey in the third quarter of 2021. However, many businesses face supply constraints that will limit their sales and put upward pressure on their costs. Together, these demand pressures and supply challenges are driving widespread plans to invest, hire staff and increase prices.


  • The outlook for domestic and foreign sales remains strong. This is especially true for firms providing hard-to-distance services. These businesses expect to benefit from an easing of some COVID‑19 restrictions and the release of pent-up demand. In contrast, firms in other sectors that have been leading the recovery continue to anticipate an increase in sales but at a slower pace.
  • In this context, more firms are facing supply-side challenges. Labour shortages are frequent and have intensified from last year when pandemic-related unemployment was high. Supply chain disruptions are more prevalent and have worsened since last quarter. Many businesses anticipate they will persist until the second half of 2022.
  • Businesses see these constraints affecting their sales and cost structures. A growing number of respondents plan to increase wages to address challenges in attracting and retaining labour. Firms intend to continue passing increases in labour and other input costs on to their customers. Growth in input and output prices remains elevated, but the pace of growth is not expected to pick up.
  • Firms’ inflation expectations moved up further. The majority of businesses anticipating inflation above 2 percent believe that the drivers of higher inflation are temporary.

Positive business sentiment is broad-based

The Business Outlook Survey (BOS) indicator remains elevated (Chart 1). Positive business sentiment is common across regions and sectors. Most firms continue to anticipate healthy growth in both domestic and foreign demand, although for those offering hard-to-distance services this means recovering from low levels. To meet demand and alleviate capacity constraints, most businesses plan to increase their capital expenditures and staffing levels over the next year. Heightened capacity constraints, including labour shortages, also contribute to the high level of the BOS indicator.

Chart 1: Business sentiment remains elevated

* The BOS indicator is a summary measure of the main survey questions that gauges overall business sentiment. Last observation:

Capacity pressures are widespread and limiting some firms’ sales

An unusually large portion of firms said they would have difficulty meeting an unexpected increase in demand (Chart 2). This is true in all sectors and regions except the Prairies (as shown in the four-quarter moving average data by region). Two important supply issues—both influenced by the pandemic—largely explain these capacity constraints: supply chain disruptions and labour shortages (Chart 3).

Chart 2: Most firms face capacity pressures

  Last observation:

Chart 3: Labour shortages and supply chain disruptions increasingly cited as constraints

Note: Mentions of a fully utilized labour force and an inability to find suitable new labour at the current wage are counted as labour shortages. Mentions of raw material constraints, transportation difficulties and logistics bottlenecks are counted as supply chain disruptions. Firms could select more than one response.

 Supply chain disruptionsLabour shortagesPhysical capacity bottlenecks

Firms frequently mentioned difficulties obtaining raw materials and goods for sale because of disruptions along supply chains. These bottlenecks are often caused by shipping delays and the impacts of COVID‑19 abroad, particularly the Delta variant. Businesses reported that these disruptions have worsened and become more common since the second quarter. Supply chain constraints are particularly acute in the manufacturing sector. Firms now expect supply chain disruptions to continue until the second half of 2022, longer than they previously anticipated.

Although some slack remains, most firms see labour markets as tighter than last year, when pandemic-related unemployment was high. In fact, labour shortages are preventing more firms from meeting growing demand (Chart 4). Firms discussed three main reasons for these labour shortages:

  • pandemic-induced factors, including travel restrictions, government income support and health concerns among workers
  • structural factors that existed before the pandemic, such as demographic or technological shifts that have created more persistent skills shortages
  • cyclical factors, particularly the strong demand for labour

These reasons are apparent in businesses’ employment and wage plans. Firms also reported somewhat higher retirement and quit rates among staff compared with pre-pandemic norms, suggesting that a change in workers’ preferences may be affecting the availability of labour. The increased quit rate is consistent with many Canadians reporting a willingness to leave their job voluntarily, as shown in the Canadian Survey of Consumer Expectations—Third Quarter of 2021.

Chart 4: Labour shortages are intensifying

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

Results from a special topic question show that firms that reported capacity pressures are responding with a combination of strategies (Chart 5). They are more likely than in the previous quarter to report that they are limiting their sales by, for example, focusing on key clients or reducing the hours they are open to customers. Beyond this, firms facing capacity challenges continue to adjust internal work processes and their supply chains through a variety of creative measures, such as working more closely with suppliers, adding overtime hours, investing in automation, and finding efficiencies. Capacity pressures are also affecting firms’ total compensation and pricing plans.

Chart 5: More firms than last quarter reported limiting their sales in response to capacity pressures

Chart 5: More firms than last quarter reported limiting their sales in response to capacity pressures

If firm reports capacity pressures: What are you doing differently because of these difficulties?

* Not asked in 2021Q2

Adjusting internal work processes3440
Limiting sales volumes3112
Adjusting supply chains1722
Adjusting workers’ compensation*16
Adjusting pricing1315
Adjusting inventories107
Too uncertain*2

The recovery in demand is progressing but remains uneven

The number of firms with improved indicators of future sales (e.g., order books, sales inquiries) remains high—a concrete signal of a broad-based strengthening in demand relative to a year ago (Chart 6, red line). The positive outlook is strongest for firms that were hardest hit by the pandemic: those that provide hard-to-distance services (e.g., hospitality, tourism, travel) and the firms that supply inputs to them. These businesses have benefited from the lifting of some restrictions over the summer months, high vaccination rates and the release of pent-up demand. These factors also support their expectations of a faster pace of sales growth over the next 12 months (Chart 6, blue bars). The Delta variant is a source of uncertainty, however, and business, conference and international travel remains well below pre-pandemic levels. Furthermore, results from this third-quarter BOS and the Canadian Survey of Consumer Expectations indicate that consumers are still cautious about engaging in social activities. Because of this, some of these firms expect a full recovery to take more than a year.

Businesses tied to housing, consumer goods (e.g., food, outdoor activities) and the government sector (especially infrastructure spending)—areas that have led the recovery—continue to have a positive outlook. While most expect sales to continue to increase, firms that experienced record sales during the pandemic anticipate some deceleration.

Chart 6: Indicators of future sales remain strong

* 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:

Although signals of demand are positive, some businesses report that capacity constraints—mostly supply chain disruptions and labour shortages—will limit their domestic and export sales (Chart 7). The majority of the affected firms anticipate sales growth at a slower rate, with a few expecting an outright decline in their sales.

Despite this, the outlook on foreign sales, particularly to the United States, remains robust overall. Exporters with positive views of sales are often tied to technology and household consumption (e.g., construction, food manufacturers and food producers). Firms in the hospitality industry that normally serve foreign tourists are optimistic about the reopening of the US border, which they anticipate will be a source of growth in the 2022 summer season. Nevertheless, these businesses expect the number of foreign tourists to remain well below pre-pandemic levels.

Chart 7: Many firms reported that lack of capacity and skills will dampen sales

* Share of exportersLast observation:

Plans to invest and hire to meet demand are widespread

A greater share of firms than in the past two surveys plan to invest more in machinery and equipment (Chart 8). This is especially true among large firms. Intentions to increase capital expenditures are due to strengthening demand—both domestic and foreign—and the need to alleviate capacity pressures, including labour shortages. About one-quarter of businesses plan to increase investments after delaying or postponing them early in the pandemic. Survey results reflect broadening investment intentions among firms in sectors leading the recovery as well as those still recovering from the pandemic. Digital technologies remain an important part of firms’ investment plans as businesses intend to invest in technologies to improve productivity and data utilization. Survey results also point to a growing focus on cyber security.

Businesses appear optimistic about their medium-term investment outlook. In response to another special topic question, more than half of firms indicated that capital expenditures over the next two to three years will be higher than what they typically were before the pandemic.

Chart 8: Higher capital expenditure plans are supported by demand

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

Employment intentions remain at record-high levels, suggesting further improvements in the labour market ahead (Chart 9). Hiring plans are mostly supported by expectations of increasing sales. In some cases, these plans are constrained by labour availability; firms mentioned a declining youth population and a lack of immigration. Plans to hire are also prevalent among the one-third of businesses with employment still below pre-pandemic levels—mainly those providing hard-to-distance services. However, most of these firms do not expect employment to fully recover over the next 12 months, suggesting continued unevenness in labour markets across sectors. Lingering uncertainty around the pandemic’s effect on consumer preferences continues to limit hiring plans for firms tied to hard-to-distance services.

Chart 9: Hiring plans are broad-based across regions and sectors

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

Capacity pressures are pushing up some business costs

Plans to increase wage growth are widespread (Chart 10). Firms reported their compensation plans are fuelled by the need to attract and retain workers amid strong labour demand.

  • In occupations with relatively lower pay, firms reported competition with government income support programs.
  • In occupations with relatively higher pay, firms reported growing demand for workers and increased competition for scarce skills.

A stable share of businesses see the rising cost of living as putting upward pressure on their wage plans. Firms expect heightened wage pressures to persist beyond the next 12 months.

Chart 10: Expectations of faster wage growth are widespread

* Percentage of firms expecting higher labour cost increases minus the percentage expecting lower labour cost increases Last observation:

Businesses continue to anticipate elevated growth in input and output prices in the next year (Chart 11 and Chart 12, blue bars). But firms expect the pace of growth to remain generally the same as over the past 12 months (Chart 11 and Chart 12, black lines). Firms plan to raise their selling prices in response to increased labour costs. They expect freight and shipping costs to continue their heightened growth but not accelerate. The growth of other non-commodity input prices is also expected to be high. When asked about price setting beyond the next 12 months, most firms indicated they expect it to be similar to their pre-pandemic pricing behaviour.

Chart 11: The growth rate of input prices is expected to remain high but not accelerate

Last observation:

Chart 12: Output price growth is stable and elevated

Last observation:

Inflation expectations increased further

Almost half of businesses now expect inflation to be above 3 percent over the next two years, with most anticipating it will be between 3 and 4 percent (Chart 13). Firms with inflation expectations above 3 percent frequently cited the following factors as supporting their expectations:

  • supply chain disruptions
  • fiscal and monetary policy stimulus
  • recent increases in food and energy prices

In response to a special topic question, most firms anticipating inflation above 2 percent and about half of those with expectations above 3 percent said that the drivers of higher inflation are temporary.

Chart 13: Almost half of firms anticipate inflation will be above 3 percent

Last observation:

The Business Outlook Survey summarizes interviews conducted by the Bank’s regional offices with the senior management of about 100 firms selected to reflect the composition of the gross domestic product of Canada’s business sector. This survey was conducted by phone and video conference from August 20 to September 16, 2021. 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.