—Labour Shortages More Intense, Limiting Sales Growth; Wages Rising Fast
–Capex Plans Backed by Demand but May Slow Amid High Costs, Higher Rates
–Consumer Survey Also Points to Higher Inflation, Uncertainty
By Max Sato
(MaceNews) – Sentiment among companies in Canada declined for the second straight quarter in April-June, hit by rising costs and supply constraints amid Covid lockdowns in China, with some firms expecting slower sales after a quick recovery from the pandemic and labor shortages hampering growth, the Bank of Canada’s quarterly Business Outlook Survey released Monday showed.
The bank is widely expected to raise interest rates a few more times in coming months to bring down decades-high inflation toward its 2% target as excess demand remains in the economy. Markets have priced in a 75-basis point hike in the policy rate to 2.25% in its next decision on July 13 following the three rate hikes totaling 125 basis points that began in March.
“The number of businesses reporting labour-related constraints and supply chain bottlenecks remains at a record high, suggesting that supply is not keeping up with demand,” the bank said. “About half of firms with supply chain challenges expect them to persist until the end of 2023 or beyond.”
“Businesses’ expectations for near-term inflation have increased, and firms expect inflation to be high for longer than they did in the previous survey,” the bank said. While most firms expect inflation to return to 2% over time, they noted various factors are needed for inflation to return to target, including higher interest rates, improved supply chains, lower oil prices and a resolution of the war in Ukraine.
The bank’s business sentiment indicator fell for the second quarter in a row after posting the first deterioration in seven quarters. It stood at 4.85 in the April-June quarter, down from 5.01 (revised up from 4.98) in January-March and 5.88 in the final quarter of 2021, but was still higher than 4.35 in the third quarter, 3.18 in the second quarter and 1.92 in the first quarter. The entire time series of the indicator is revised after every release.
The indicator plunged to minus 6.37 in April-June 2020 from minus 0.79 in the previous quarter (the first negative figure in three quarters) in the first wave of the pandemic but picked up to minus 2.49 in July-September 2020 and plus 0.66 in the following three-month period.
The latest survey was conducted by phone, video conference and in-person interviews from May 9 to May 27.
Businesses with slowing sales growth are mainly linked to housing, natural resources and transportation while the outlook among those in the services sector is positive due to eased public health restrictions and pent-up demand.
Labour Shortages More Intense
For four consecutive quarters, the share of firms reporting labour shortages as being more intense than a year ago has been at or near a record-high level.
“This suggests the labour market has tightened significantly over the past two years,” the bank said. “Initially, this tightening reflected a recovery relative to weak labour markets; in the past two quarters, the tightening has continued but is relative to more normal labour market conditions.”
Capex Growth May Slow on High Costs, Higher Rates
The number of firms intending to increase their investment spending remains high, backed by strong domestic and foreign demand, long-term strategic plans,
a need to expand capacity or improve productivity, often through digitalization and automation amid labour shortages.
But some firms plan to reduce their investment spending after significant capital expenditures in recent years. “A few businesses noted that the prices of capital goods and higher interest rates may potentially affect the viability of their investment plans, but such factors are not yet holding them back,” the bank said.
The percentage of firms expecting higher investment spending minus the percentage expecting lower investment spending fell to 37 in April-June from 42 in January-March and 47 in October-December.
Firms Raising Wages to Secure Workforces
The average expected wage increase climbed to a survey-high level. Many firms continue to report plans for raising wages to attract and retain workers. In addition, a growing number of businesses mentioned the rising cost of living as an important source of wage growth. Nearly half of firms anticipate their wage increases will remain above pre-pandemic levels beyond the next 12 months.
The index based on percentage of firms expecting higher labour cost increases minus the percentage expecting lower labour cost increases stood at 61 in the second quarter, down from 68 in the first quarter and to a record high of 71 in the final quarter of 2021. The average expected year-on-year increase in wages for the next year surged to 5.8% in April-June from 5.2% in January-March.
High Inflation to Stay Longer
Most businesses anticipate inflation will be more than 3% on average over the next two years. Compared with last quarter, businesses expect inflation to be high for longer. Nearly one-quarter of firms expect inflation to stay well above 2% for three years or more.
Consumers Also See Higher Inflation
The bank’s quarterly Canadian Survey of Consumer Expectations showed that short-term inflation expectations have reached record-high levels. “Consumers expect inflation to be high for essentials such as food, gas and rent,” the bank said. “This is a source of concern, especially for low-income consumers.”
Canadians believe supply chain issues, the pandemic and elevated government spending are driving high inflation, and these factors are also seen as more persistent than in recent quarters, making the bank’s mandate to stabilize inflation more challenging.
“For example, more people now think it will take longer than two years to resolve supply issues,” the bank said. “Some consumers believe the war in Ukraine is far from over and will lead to lasting higher prices for food and gas. Overall, Canadians are more uncertain now about how inflation will evolve, and survey respondents are more likely to have opposing views.”
Rising Costs, Higher Interest Rates Pose Uncertainty
The survey showed that one-year ahead inflation projections among consumers hit another survey high of 6.82% in the second quarter, up sharply from 5.07% in the previous poll. Two-year inflation expectations also rose to a fresh high of 5.02% from 4.62% while five-year forecasts rose to 4.0% after easing to 3.23% in the first quarter from 3.5% in the fourth quarter.
The online survey for the second quarter was conducted from April 28 to May 13. Follow-up telephone interviews were conducted by the market research firm Nielsen on behalf of the bank from June 3 to June 10.
Official data released on June 22 showed that Canadian consumer prices jumped 1.4% on the month in May, driving the annual headline inflation rate up to 7.7% from 6.8% in April, and posting the fastest pace of increase since 1983.
Most respondents indicated the Bank of Canada has the credibility and tools to bring inflation back to target. “Their belief in the bank’s ability to achieve its inflation target has not changed materially since before the pandemic,” the bank said.
“Those who have noticed a slowing in the housing market have more confidence that the bank can achieve its inflation target,” it said. “However, some consumers think reducing inflation will be difficult. Many are unsure about the impact of higher interest rates on inflation given that these higher rates also increase the cost of borrowing.”
Inflation is also affecting consumer behavior. Among respondents aged 18 to 54 years who are not in the labour force, more than half said they would consider looking for a job if they could work from home or had access to flexible work arrangements. “In interviews, some respondents said that high inflation is one of the reasons these work arrangements are so attractive,” the bank said. “If they can work from home, they would not need to spend as much on parking, gas, bus passes, lunches and clothes.”