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Results of the second-quarter 2023 survey | Vol. 20.2 | June 30, 2023

Results from the second-quarter 2023 Business Outlook Survey and the Business Leaders’ Pulse surveys from April through June 2023 show that firms continue to anticipate weak sales growth ahead. Nevertheless, businesses reported that their indicators of domestic demand have moved up compared with a year ago as uncertainty about the path of future interest rates and concerns of a recession fade. Although firms’ price-setting behaviour is gradually shifting closer to what it was before the pandemic, businesses continue to expect wage and price increases to be larger than normal.


  • Businesses continue to expect weak sales growth. For firms tied to housing and consumer discretionary spending, elevated interest rates are dampening their outlook. However, many businesses noted that their indicators of domestic demand are up slightly compared with a year ago. This change is tied to several factors, including:
    • less perceived uncertainty about the future path of interest rates
    • fewer concerns about a recession
    • upcoming large capital projects in both the private and public sectors
    • improved supply chains
    • continued recovery from the pandemic
  • Overall, firms are planning for modest increases in their capital expenditures due to weakened demand prospects as well as higher financing and construction costs. Still, investment intentions among businesses tied to the natural resources sector remain healthy and are supported by strong global demand and favourable pricing conditions.
  • Although labour shortages remain common in some sectors, pressures on the labour market are easing due to decreased competition for workers and increased labour supply. In this context, firms expect growth in their wages to moderate from high levels.
  • Businesses’ price-setting behaviour is gradually shifting closer to what it was before the COVID‑19 pandemic. But some firms are still planning to make larger and more frequent price increases than usual in the coming year. They said this is because they have not yet finished passing through the cost increases they experienced during the pandemic.
  • Firms’ expectations for short-term inflation continue to decline gradually but remain high. Most businesses anticipate that, in the long term, inflation will be within the Bank of Canada’s inflation-control target range. However, a greater number of firms than in the first-quarter 2023 survey think it will take five years or more for inflation to return close to 2%. They see inflation being held up by high government spending and strong demand.

The Business Outlook Survey indicator continues to fall

The Business Outlook Survey (BOS) indicator, a summary measure of core questions in the BOS, declined again to a more negative value than in recent surveys (Chart 1). Results for all categories of questions, regions and sectors are now contributing negatively to the indicator this quarter. Measures related to firms’ sales growth show that expectations remain muted. The decrease in the BOS indicator mainly reflects:

  • more businesses expecting slower price growth
  • weaker hiring and investment intentions
  • broader tightening in credit conditions
  • eased capacity pressures, particularly related to supply chain bottlenecks

The continued fall in the BOS indicator signals less inflationary pressure than in recent quarters.

Chart 1: The BOS indicator is negative again

Business sentiment weakened this quarter for firms surveyed in the Business Leaders’ Pulse (Chart 2). Although firms still see cost pressures and labour shortages as top concerns, these have been mentioned less and less over the past year. In contrast, slowing demand has become a more important and widespread concern in recent quarters (Chart 3). Despite this, fewer firms expect an outright recession: one-third of firms participating in this quarter’s BOS are planning for a recession, compared with one-half in the first quarter.

Chart 2: Business sentiment has declined

Chart 3: Firms are increasingly concerned about slowing demand

Firms still expect weak sales growth

Businesses continue to anticipate their sales growth will be weak over the next 12 months. One in five firms now expects an outright decline in sales. The dampening effect that higher interest rates have had on demand has broadened beyond firms tied to housing activity. Businesses linked directly and indirectly to consumer discretionary spending also think that high interest rates have curbed sales of their products and services and that this trend will continue. Furthermore, firms’ indicators of future sales (e.g., order books, sales inquiries) remain well below historical average levels (Chart 4, red line).

Still, several firms are anticipating an increase in domestic demand, pointing to:

  • reduced uncertainty about the future path of interest rates, leading to less hesitancy among homebuyers
  • fewer concerns about a recession
  • upcoming large capital projects in the private and public sectors to help the transition to net-zero emissions or to support strong population growth
  • improved supply chains allowing firms in the trade sector to work through backlogs, including for auto sales
  • continued recovery from the pandemic

In addition, compared with recent quarters, fewer businesses are expecting sales growth to slow (Chart 4, blue bars). One reason for this is that their sales have already slowed—a smaller number of firms than in recent surveys had significant sales increases over the past year.

Chart 4: Businesses expect their sales growth to slow modestly

Overall investment intentions have declined (Chart 5) and are now near the historical average. Intentions to invest remain strong for firms tied to the natural resources sector, where demand and prices are still healthy even though they have fallen in the past year. For other businesses, investment intentions have diminished and are weak. Soft demand, high construction costs and rising interest rates are increasingly weighing on firms’ plans. These factors are most evident among businesses in construction and real estate.

Chart 5: Investment intentions are weak for firms not tied to natural resource activity

Pressures on the labour market are easing

Businesses continue to point to tightness in the labour market:

  • Reports of binding labour shortages continue to be common among firms in manufacturing, construction and retail trade. Businesses in these industries indicate that strong competition for labour makes it difficult to find workers, especially in the skilled trades. They also mention structural challenges, such as the aging population, shifting occupational preferences and decreasing rural populations. These same issues were also widespread in these industries in the few years immediately before the pandemic, when the labour market was tight.
  • Although below its peak, the average size of planned wage increases is still well above normal among surveyed firms (Chart 6, red line). Private sector workers who participated in the Canadian Survey of Consumer Expectations also have heightened expectations for wage growth.

Chart 6: Firms expect wage increases to remain high

However, firms continue to signal that pressures on the labour market have eased from elevated levels in 2021–22:

  • Businesses view current labour shortages as less intense now compared with a year ago when they were exceptionally widespread (Chart 7, red line). As in the previous survey, firms pointed to two main forces that are making it easier for them to find workers:
    • decreased competition for labour in a context of weaker demand growth
    • increased labour supply (e.g., newcomers to Canada entering the labour force)
  • Firms’ demand for labour is softening as their sales expectations moderate. Indeed, fewer businesses than in recent quarters plan to grow their staff levels to meet expected sales growth or expand their operations.
  • Since 2021, the number of firms reporting labour shortages as one of their top concerns has steadily declined (Chart 3).
  • For the first time since the beginning of the pandemic, businesses anticipate slower wage growth over the next 12 months (Chart 6, blue bars). Fewer firms than in previous surveys mentioned the need to increase wages faster to attract and retain workers.
  • Businesses expect their wage growth to slow further by 2025–26, which many attribute to expectations that pressures on inflation and labour markets will ease.

Firms participating in the June 2023 Business Leaders’ Pulse survey reported employing more newcomers to Canada than they typically employed three to four years ago. In addition, recent consultations with organizations that support new immigrants to Canada indicate that newcomers are quickly finding jobs due to high labour demand. Despite these developments, challenges remain. Many businesses view the process of hiring immigrants as cumbersome. And, on arrival, newcomers continue to be underemployed relative to their skills.

Chart 7: Labour shortages are less intense than 12 months ago

Firms still plan to raise prices more than usual

During the recovery phase of the pandemic, businesses started making larger and more frequent price increases than in the past. They did so in response to elevated cost growth, widespread supply constraints and strong demand. As these pressures fade, firms’ price-setting practices are gradually shifting closer to what they were before the pandemic. For the fourth consecutive quarter, firms expect their input and output prices to grow at a slower rate (Chart 8). Businesses expect price pressures to ease due to several factors, especially:

  • weaker growth in commodity prices, including outright price declines for fuel and steel
  • softer demand conditions
  • slower price growth for non-commodity goods

With firms expecting wage growth to ease, they no longer anticipate that labour-related costs will add upward pressure on their output price growth over the next year. While many businesses are still raising wages by more than they typically do, they are managing these elevated wage increases in other ways, including by:

  • using technology to be more efficient and reduce the need for labour
  • absorbing the higher costs through lower profit margins

Chart 8: Businesses continue to expect price growth to slow

Although price growth is easing, businesses have not yet returned to their pre-pandemic price-setting behaviour. Several firms are still planning to make larger and more frequent price increases in the coming year than they usually would (Chart 9). The continuation of higher-than-normal price growth is tied mainly to lags in the pass-through of previous increases in input prices, which is not yet complete.

Chart 9: Firms’ expected price increases remain larger than normal

Inflation expectations continue to decline gradually

Firms’ expectations for inflation in the short term have edged down again but continue to be elevated (Chart 10). Businesses most commonly attribute short-term inflationary pressures to high labour costs, robust government spending and a strong domestic economy. In contrast, 3 in 10 firms anticipate that inflation will soften to between 2% and 3% on average over the next two years. These businesses attributed their expectations of weaker inflation to monetary policy actions that the Bank has taken throughout the past 15 months.

Overall, firms still expect inflation in the long term to be within the Bank’s inflation-control target range. However, several businesses—more than in recent surveys—think it will take five years or longer for inflation to return to the Bank’s 2% target (Chart 11). They noted several factors that will hold inflation up, including:

  • high government spending
  • strong demand—either for housing or linked to the pandemic (e.g., pent-up demand, extra savings)

Chart 10: Firms expect inflation in the short term to remain elevated

Chart 11: Several businesses expect high inflation to persist until 2028 and beyond

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 May 8 to 25, 2023, before the Bank raised the policy interest rate on June 7, 2023. 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. Most questions in the Business Leaders’ Pulse (BLP) survey address special topics and are not asked every month. Each chart in this Business Outlook Survey that presents BLP data shows the most recent observation for those data. Survey results summarize opinions expressed by the respondents and do not necessarily reflect the views of the Bank of Canada.

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