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Results of the fourth-quarter 2022 survey | Vol. 19.4 | January 16, 2023

Results from the fourth-quarter 2022 Business Outlook Survey and the Business Leaders’ Pulse surveys from October 2022 through January 2023 show that business sentiment has continued to weaken. As a result of rising interest rates, firms’ sales expectations and investment plans are softening. Capacity pressures have moderated from elevated levels. In this context, firms expect a slower pace of price increases.


  • Rising interest rates are dampening firms’ sales expectations and plans to invest (Box 1). Firms also link their weaker outlook on demand to high inflation eroding consumers’ spending power and to the possibility of a recession. More businesses than usual expect their sales to decline.
  • Amid softer demand and recent improvements in supply chain issues, pressures on businesses’ production capacity have eased from high levels.
  • Firms continue to expect inflation to be above the Bank of Canada’s inflation target in the short term. Businesses anticipate slower growth in their input and output prices, mainly due to falling commodity prices and weakening demand. Many firms are gradually returning to price-setting practices they used before the pandemic. In particular, they are reducing the size and frequency of their price changes relative to the past year.

Business confidence continues to weaken

Business sentiment has deteriorated again. In an environment with softening demand and moderating capacity constraints, results for almost all survey questions used to calculate the Business Outlook Survey (BOS) indicator have decreased. The BOS indicator declined this quarter to roughly zero (Chart 1). This level is slightly below the average of the past 10 years, suggesting business confidence is somewhat weaker than usual.

Chart 1: The BOS indicator moved down again

* Capacity indicators are those related to labour shortages, labour shortage intensity and the ability to meet demand.
† The BOS indicator is a summary measure of the main Business Outlook Survey (BOS) questions. It gauges overall business sentiment.Last observation:

Concerns about demand and credit have risen among firms (Chart 2). While many businesses still view cost pressures, labour shortages and supply chain issues as pressing, these challenges have lessened in importance this quarter.

Chart 2: Concerns about demand and credit have increased

Note: This question was not asked during the July through September 2022 surveys of the Business Leaders' Pulse.
Source: Bank of CanadaLast observation: December 2022

Cost pressures56.2959.7561.1057.34
Labour shortages64.3452.1047.5244.50
Demand or sales18.5322.7218.2831.88
Supply chains50.0043.9542.8227.75

While most firms expect Canada to be in a recession within the next 12 months, the majority of those firms think it will be mild. They are not currently making any major changes to their operations in anticipation of a possible recession. Still, some businesses are tightening budgets or pausing expansions. A few firms think a recession will ease supply chain challenges, labour shortages and cost pressures. Most businesses see the causes of a recession being interest rate increases and high prices reducing households’ capacity to spend.

More firms than usual expect weaker demand

For the fourth consecutive quarter, businesses anticipate their sales growth will slow. For more than one-third of all firms, this is after significant sales increases over the past year. Close to 3 in 10 businesses—considerably more than usual—expect their sales to decrease (Chart 3), with most attributing the decline to weaker domestic demand. Of firms expecting lower sales, many have already seen a deterioration in their future sales indicators (e.g., sales inquiries and order books) compared with 12 months ago. Several firms reported that rising interest rates are slowing demand related to housing activity and household consumption (Box 1). Other businesses linked their softer sales outlook to high inflation reducing household spending and to expectations for a recession.

Still, overall, firms anticipate that their sales will continue to grow. Businesses tied to commodities expect robust demand, which some linked to elevated commodity prices. A few exporters reported that the weaker Canada–US exchange rate has a favourable effect on their sales outlook.

Chart 3: More businesses than usual expect their sales to decline

Firms’ investment and employment intentions continue to moderate, falling to near their historical averages (Chart 4). Roughly one-fifth of businesses reported that tighter financing conditions or uncertainty (such as around future economic conditions) are holding back their capital expenditure plans (Chart 5). More than one-quarter of firms reported that financing conditions have tightened over the past three months, beyond the recent prime rate increases. Compared with past surveys, particularly from recent quarters, fewer businesses reported domestic demand as a driver of their plans to invest more or add staff. Meanwhile, most firms’ investment plans are driven by longer-term strategies and are not dependent on financing conditions.

Several businesses expecting weaker demand are taking a cautious approach to hiring. Still, almost half of firms mentioned they plan to add staff to meet anticipated sales growth or to fill vacant positions.

Chart 4: Firms’ plans to increase investment and add staff continue to trend down

* Percentage of firms expecting higher investment spending minus the percentage expecting lower investment spending
† Percentage of firms expecting higher employment levels minus the percentage expecting lower employment levelsLast observation:

Chart 5: Financing costs are holding back firms’ investment plans

Chart 5: Financing costs are holding back firms’ investment plans

Reasons for firms’ planned investment expenditures over the next 12 months (share of firms)

* Export-oriented firms only

 Impediments to investmentDrivers of investmentBalance
Long-term strategy-5.060.455.4
Existing capacity0.018.818.8
Domestic demand-7.925.717.8
Export demand-2.013.911.9
Cash flow or balance sheet-
Cost of capiital goods-5.91.0-5.0
Prior-year investment-13.97.9-5.9
Cost or availability of external financing-14.90.0-14.9

Box 1: Rising interest rates are weighing on firms’ outlooks

Nearly three-quarters of businesses reported that rising interest rates are having unfavourable effects on their operations and decisions. These firms have weaker outlooks than others across multiple indicators (Chart 1-A). Most businesses that are negatively affected expect growth in their sales to slow and in many cases decline. Signs of softening demand are most pronounced in sectors that are highly sensitive to interest rate changes, such as those tied to housing activity and consumer spending. Businesses that anticipate weaker sales growth expect to raise their output prices at a slower pace.

Chart 1-A: Firms negatively affected by higher interest rates have weaker outlooks than other businesses

 Unaffected or positively affected by higher interest ratesNegatively affected by higher interest rates
Future sales growth expectations4-33
Investment intentions683
Employment intentions4631
Output price growth expectations7-15

Firms citing unfavourable impacts from higher interest rates have more subdued investment and hiring intentions than other respondents. Many of these firms said that higher borrowing costs, reduced demand and increased uncertainty due to rising interest rates are holding back their plans. More than one-quarter of these firms expect to cut their capital spending—sometimes by 20% to 30% or more—over the next year relative to what they had previously planned. A few firms with intentions to invest more this year indicated that their plans could change if interest rates increase further.

In response to rising interest rates, businesses also reported:

  • paying down or restructuring their debts
  • finding ways to cut costs and improve efficiencies
  • raising their prices to pass on related costs

About one-quarter of firms said they are either:

  • unaffected by rising interest rates because:
    • they have no debt
    • their debts are held within financing contracts at lower interest rates
  • benefitting from the higher interest income on their large cash positions

Capacity pressures have eased from high levels

The share of firms reporting capacity pressures has moderated. Although still above pre-pandemic levels, the number of businesses reporting labour and supply chain bottlenecks as obstacles to meeting an unanticipated increase in demand has declined (Chart 6). This suggests that the gap between demand and supply is narrowing.

Many businesses reported that their supply chain issues have improved compared with three months ago. Relative to earlier in the year, fewer firms are expecting to experience sales losses from supply chain frictions. Roughly half of businesses surveyed think most issues will be resolved by the end of 2023. Still, almost one in four firms sees supply chain challenges as an obstacle to meeting an unexpected rise in demand.

As demand softens, a growing number of firms characterize labour shortages as less intense than last year, signalling an easing in some labour markets. Nonetheless, the share of businesses that reported binding labour shortages remains above the historical average. Firms with difficulties finding workers continue to attribute these issues to temporary factors (e.g., strong cyclical competition for labour) and structural changes (e.g., the aging population, shifting occupational preferences away from skilled-trade jobs such as those in construction, transportation and natural resource industries).

Chart 6: Reports of labour and supply chain bottlenecks have moderated

* Mentions of a fully utilized labour force and an inability to find suitable new labour at the current wage are counted as labour bottlenecks. Mentions of raw material constraints, transportation difficulties and logistics issues are counted as supply chain bottlenecks. Firms could mention more than one bottleneck; mentions were then pooled and counted only once by type of bottleneck.Last observation:

Firms think inflation will stay high in the short term

Firms’ short-term inflation expectations are roughly unchanged—they remain above the Bank’s inflation target (Chart 7). As in the previous survey, respondents attribute inflationary pressures to:

  • elevated energy prices
  • persistent supply chain issues
  • high labour costs
  • a strong economy

Businesses continue to expect inflation five years from now to be in the Bank’s inflation-control target range of 1% to 3%. The Canadian Survey of Consumer Expectations (CSCE) shows that consumers’ expectations for inflation five years ahead are near survey-low levels. Together, these results suggest that both businesses and consumers believe that short-term inflationary pressures will eventually fade.

Chart 7: Firms’ short-term inflation expectations remain elevated

Note: BLP is the Business Leaders’ Pulse, and BOS is the Business Outlook Survey. The BOS 2‑year estimate is based on firms’ responses to the BOS question, “Over the next two years, what do you expect the annual rate of inflation to be, based on the consumer price index?” Firms can select from predetermined ranges and provide a point estimate. In cases where a firm selects a range only: if the range is closed, a midpoint is used; if the range is open‑ended, the average expectation of other firms in that range is used. The BLP survey asked businesses, “What do you expect the rate of annual inflation to be in about one, two and five years from now?” BLP estimates use the midpoints of multiple-choice buckets, with values assigned to open-ended buckets (-1% and 9% for the “deflation” and “8% or higher” buckets, respectively). This question was not asked in the BLP in January or March 2022. January 2023 results are preliminary and range from January 4 to 10, 2023.Last observations: Business Leaders’ Pulse, January 10, 2023; Business Outlook Survey, 2022Q4

Other results suggest some uncertainty around firms’ long-term expectations. More than one-third of businesses—a greater number than in recent quarters—expect inflation to stay well above 2% for three years or more (Chart 8). These firms think it will take time for:

  • energy prices to decline, which several firms linked to a resolution of the war in Ukraine
  • supply chain issues to be resolved
  • demand to weaken
  • labour markets to slacken enough to ease growth in labour costs
  • monetary policy to slow inflation

Chart 8: Many firms expect inflation to stay above 2% for three years or more

* Not applicable category includes firms with inflation expectations below or not materially above 2%.

First half of 202322.286.681.002.48
Second half of 202314.369.4111.006.19
2026 and beyond6.9315.8421.5039.11
Not applicable or don't know19.8025.7417.003.96

Price and wage expectations remain elevated but are moderating

Large shares of businesses anticipate their input and output prices will grow at a slower rate over the next 12 months (Chart 9). Firms that expect their selling price increases to slow linked the downward pressure to:

  • weaker price growth for commodity-related inputs
  • softer demand conditions
  • slower non-commodity cost increases partly due to improving supply chain issues
  • greater competition

The number of businesses expecting their input and output prices to decrease is greater than earlier in 2022 but is not unusually high. These expectations are mainly linked to lower prices for commodities (e.g., oil, lumber).

After a period of unusual price-setting behaviour during the pandemic, many firms are gradually returning to or will soon return to their pre-pandemic practices (described in Box 1 in the third-quarter 2022 Business Outlook Survey).1 This includes:

  • reducing the size and frequency of price increases compared with the past 12 months
  • waiting for cost increases to be realized before considering changes in prices
  • tracking competitors’ pricing

Still, several businesses continue to describe their price-setting environment as unusual. Roughly one-quarter of firms still anticipate large price increases, which is fewer firms than earlier this year but more than normal (Chart 10). Some of these businesses said price adjustments related to previous supply disruptions continue to filter through their supply chains and drive up their costs.

Chart 9: Businesses expect growth in their input and output prices to slow

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

Chart 10: Many firms still expect large input and output price increases

Last observation:

Rising labour costs are a continued source of upward pressure on firms’ selling prices. While this pressure is more widespread than normal, it is easing. This partly reflects a softening in expectations for wage growth, which have moved down but remain above pre-pandemic levels (Chart 11). Fewer businesses than last quarter said they are raising their wages faster to attract and retain workers. Similarly, firms’ hiring intentions have moderated, and fewer businesses report binding labour shortages. CSCE results show that workers continue to expect modest wage growth.

Chart 11: Expectations for faster wage growth are less widespread

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

  1. 1. See R. Asghar, J. Fudurich and J. Voll, “Firms’ inflation expectations and price-setting behaviour in Canada: Evidence from a business survey,” Bank of Canada Staff Analytical Note (forthcoming).[]

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, video conference and in-person interviews from November 14 to December 2, 2022. 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.

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