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Results of the third-quarter 2023 survey | Vol. 20.3 | October 16, 2023

Results from the Business Outlook Survey and the Business Leaders’ Pulse show that firms expect their sales growth to be subdued over the next 12 months. This slowdown in demand is reducing capacity pressures and weighing on businesses’ plans for investment and employment. Although cost and pricing pressures continue to moderate, they are still expected to be higher than normal in the coming year. Firms’ inflation expectations edged down but remain higher than they were before the COVID‑19 pandemic. Many expect returning inflation to the Bank of Canada’s 2% target will take longer than three years.


  • Firms reported that economic activity has slowed across a broad range of indicators. Their expectations for sales growth—especially sales to domestic customers—continued to moderate.
  • Roughly half of businesses said that their pricing practices are not yet back to normal. On balance, firms are still planning to make larger and more frequent price increases than they did before the COVID‑19 pandemic. But they expect to raise their selling prices at a slower rate than in the past 12 months as the pace of increases in their input costs slows.
  • Negative impacts from rising interest rates are spreading. More businesses think higher rates will constrain their sales and investment plans in the next 12 months.
  • In the context of weakening demand, firms are planning to slow hiring, though few intend to lay off workers. Wage growth is still expected to be higher than normal, despite both demand and labour markets softening.
  • Firms’ inflation expectations continue to edge lower as many see the effects of tighter monetary policy putting downward pressure on inflation. Despite this, inflation expectations remain high, and many firms think inflation will stay above 2% for longer than three years.

The Business Outlook Survey indicator is lower again

The Business Outlook Survey (BOS) indicator fell further in the third-quarter survey (Chart 1). The summary measure of core questions in the BOS is now at its lowest level in over a decade, except for a brief period early in the COVID‑19 pandemic. The continued drop in the indicator reflects:

  • weaker past sales growth and indicators of future sales than in past surveys
  • reduced plans for hiring and for capital expenditures
  • an increasingly widespread view that labour shortages are less intense than 12 months ago
  • more firms than in recent quarters reporting expectations of slower growth in costs and selling prices

Chart 1: The BOS indicator has declined further

Further, when asked what their most pressing concerns are, fewer firms than in previous surveys mentioned cost pressures, labour shortages or supply chains. Despite this, cost pressures remain the top issue for firms. Concerns around slowing demand and tighter credit conditions, meanwhile, continue to rise (Chart 2).

Chart 2: Concerns about slowing demand continue to rise

Abnormal price increases continue

About half of businesses reported that their pricing behaviour is abnormal. And looking forward, on balance, firms continue to plan larger and more frequent price increases than usual over the next 12 months (Chart 3). Some firms are still passing the uncommonly large cost increases they faced earlier in the pandemic through to customers. These higher costs were due to:

  • supply chain issues
  • strong demand
  • unusually large wage increases

Some businesses noted that it takes time to renegotiate contracts between firms, allowing for earlier cost increases to be passed through. Others mentioned that some regulated prices—such as for utilities and wages—adjust to past inflation and therefore will continue to put upward pressure on their selling prices due to the recent period of particularly high inflation. Some firms indicated they do not know when pricing will return to normal because they are uncertain about the future of interest rates and inflation. In addition, firms also reported facing increased costs from higher borrowing rates.

Chart 3: Firms still plan to raise prices more than normal

Around half of the firms that changed their prices more often than they usually do expect to make more-frequent-than-normal price increases over the next 12 months. But signs indicate that pricing behaviour is moving toward normal. About one-third of firms that adjusted their prices by an unusually large amount in the past 12 months said the size of their price increases will be close to normal within the next 12 months. Businesses anticipate that the rate of input cost growth will slow after having increased significantly over the past year. This is particularly the case for:

  • wages
  • commodities and related inputs

With lower cost increases to pass through to customers, firms across all regions and sectors expect their output prices to grow at a slower pace. Further, a continued softening in demand conditions is creating an environment where firms are less able to pass through input cost increases.

Demand has slowed and outlooks remain subdued

Businesses reported that demand has slowed, contributing to weak sales growth over the past year. The share of firms citing outright declines in their sales also increased notably—one-third of respondents said their sales have fallen over the past year. The slowdown in demand is widespread across regions and sectors.

Firms expect growth in demand to continue to be subdued, with indicators of future sales (e.g., order books, sales inquiries) low relative to their historical norms (Chart 4). At the same time, the share of firms planning for a recession in the coming year—about one-third—has not risen.

Chart 4: Firms’ sales outlooks remain weak

Reports of softer demand are broad-based. Areas of weakness include:

  • consumer spending—particularly for discretionary purchases—including substituting away from higher-end goods toward more affordably priced options
  • real estate, where increased interest rates and high construction costs are reducing the profitability of new developments

Still, businesses see a few areas of resilience. Although firms expect their export sales to be weaker than average, they view indicators of export demand as somewhat more positive than those of domestic demand. Public sector spending is also supporting firms’ sales growth.

An increasing share of firms across a broad range of sectors reported that higher interest rates are negatively affecting them (Chart 5). Compared with unaffected firms, those that are negatively impacted by higher interest rates:

  • have experienced softer growth in their past sales
  • see weaker indicators of future sales
  • expect price growth to be more muted in the next 12 months
  • are planning to invest and hire less

While most businesses remain confident that they can repay existing debts, firms that said interest rates are critical to their operations reported having greater difficulty meeting their short-term financial obligations.

Chart 5: The negative impacts of higher rates are widespread

More than half of firms surveyed believe that the effects of past monetary policy tightening on their business are far from over (Chart 6). This is consistent with results from the Bank of Canada’s Canadian Survey of Consumer Expectations. Firms are impacted primarily through the higher cost of debt that they and their customers face.

Chart 6: Firms believe the impacts of tightened monetary policy are just beginning

Businesses continued to report having only modest plans for hiring and capital expenditures (Chart 7). They often attributed these weaker expectations for employment and investment to:

  • reduced demand
  • waning capacity pressures

Tighter credit conditions are also weighing on some firms’ investment plans. One in three businesses expects an outright reduction in their capital spending over the next 12 months.

Chart 7: Firms’ hiring and investment plans continue to trend down

Firms see labour market pressures easing

Intentions to hire are below their historical average. A larger share of firms than in previous surveys said they have adequate staffing levels given their sales outlook, and fewer businesses need to fill vacancies. Only a small share of firms plan to reduce their workforce. Those that are cutting staff tend to be negatively affected by interest rate increases.

Firms reported a widespread easing in the intensity of labour shortages compared with the very tight labour market at this time last year (Chart 8). As a result, firms have:

  • fewer sales losses due to labour shortages
  • less difficulty attracting high-skilled labour, including technical and information technology workers

Some of this easing of the labour market is tied to increased immigration. Also, mentions of shortages caused by strong market competition for labour declined from recent quarters. Still, pockets of tightness exist, and these are often related to structural factors (e.g., aging population, remote locations) or persistent shortages of workers in skilled trades. The share of firms reporting binding labour shortages is near its historic average.

Chart 8: Labour market pressures continue to ease

In this context, firms anticipate a gradual easing in wage growth over the next 12 months (Chart 9). Compared with recent quarters, fewer firms reported upward pressure on wage growth from the:

  • cost of living, following the large wage adjustments over the past 12 months
  • need to attract and retain employees, as labour demand and competition for workers slows

Businesses also said that because demand has slowed, their own performance and profitability are weighing on the wage increases they plan to give. Although wage pressures are easing, firms still expect to make higher-than-normal wage increases over the next year. Many businesses are uncertain about when their wage growth will return to normal, citing factors such as:

  • tightness in some markets for specific skills
  • policy-related issues, including the impacts of minimum wage legislation
  • the rate of inflation

Chart 9: Expected wage increases remain high but are easing

Inflation expectations are declining slowly

Firms’ short-term inflation expectations have continued to edge down (Chart 10). An increasing share of businesses are confident that the Bank of Canada will be able to get inflation within the inflation-control target range in the next one to two years. Many think monetary policy is slowing inflation.

However, expectations for inflation over the next two years are still above pre-pandemic levels. Firms attribute their short-term inflation expectations to:

  • labour costs
  • commodity prices
  • housing prices

Most firms think inflation will return to 2% in the long term, but uncertainty about when this will happen has increased. Roughly one-third of firms still believe it could take longer than three years before inflation returns to the Bank’s 2% target.

Chart 10: Firms’ short-term inflation expectations eased down further

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 August 14 to September 8, 2023. Additional information on the survey and its content is available on the Bank of Canada’s website. Survey results summarize opinions expressed by the respondents and do not necessarily reflect the views of the Bank of Canada.

The Bank of Canada’s Business Leaders’ Pulse is a survey of 700 to 800 Canadian business leaders who respond to one of three short online questionnaires each month. This publication contains results from the July, August and September 2023 surveys. For more information on the Business Leaders’ Pulse, see T. Chernis, C. D’Souza, K. MacLean, T. Reader, J. Slive and F. Suvankulov, “The Business Leaders’ Pulse—An Online Business Survey,” Bank of Canada Staff Discussion Paper No. 2022-14 (June 2022). Survey results summarize opinions expressed by the respondents and do not necessarily reflect the views of the Bank of Canada.

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