–Firms See Rising Costs Amid Ukraine War, Higher Wages due to Tight Labor Markets
— 70% of Firms in Canada See Above 3% Inflation Over 2 Years Vs. 67% in Q4
— BOC Consumer Survey: Prices Surge but Longer-Term Inflation Views Anchored
By Max Sato
(MaceNews) – Sentiment among companies in Canada dipped in the first quarter of 2022 amid surging energy and commodities prices and uncertainty over supply chains caused by the war in Ukraine, but stayed relatively high on reopening demand, with some firms reporting better sales prospects as provinces eased Covid restrictions, the Bank of Canada’s quarterly Business Outlook Survey released Monday showed.
Despite headwinds for global and domestic economic growth, the bank is widely expected to continue raising interest rates to help ease red-hot consumer inflation and real-estate markets after conducting its first rate in over three years in early March. Its next rate decision is scheduled for April 13.
The BOC’s business sentiment indicator posted the first deterioration in seven quarters, slipping to 4.98 in the January-March quarter of 2022 from 5.90 (revised from 5.99) in the final quarter of 2021, 4.43 in the third quarter, 3.42 in the second quarter and 2.19 in the first quarter a year ago. The entire time series of the indicator is revised after every release.
The indicator plunged to minus 6.54 in April-June 2020 from minus 0.70 in the previous quarter in the first wave of the pandemic but picked up to minus 2.34 in July-September 2020 and plus 0.86 in the following three-month period.
The latest survey was conducted by phone and video conference with about 100 firms from Feb. 7 to Feb. 25, 2022. To assess the impact of Russia’s invasion of Ukraine on Feb. 24, the bank conducted a follow-up online survey of 152 firms from March 4 to March 10.
Just over half of those polled (77 of 152) expect to be affected by the conflict, most commonly through higher cost pressures due to increased prices for energy and other commodities.
“The BOS indicator remains elevated, reflecting tightness in capacity as well as expectations for stronger business activity and for faster price growth,” the bank said. “Despite some anticipated moderation in sales growth, firms’ sales outlooks remain robust. However, most businesses continue to report that labour-related constraints and supply chain disruptions due to the pandemic are affecting their ability to meet demand.”
Costs Rising, Supply Disruptions Worse as War Rages on
Among the firms expecting the conflict to increase their input costs due to supply chain disruptions, many depend on goods coming from Europe or Asia, the bank said. They anticipate rising transportation costs and longer delivery times, beyond those related to the Covid-19 pandemic, while others expect delays and reduced availability of commodities.
“Many firms plan to pass conflict-related cost increases on to their customers,” the bank said.
The survey found that firms tied to energy and other commodities expect higher sales, but that others anticipate their sales will be lower because of supply chain disruptions and increased uncertainty.
“Some businesses noted that lingering uncertainty related to the pandemic, particularly around supply chain disruptions and associated costs, has been intensified by the conflict,” the bank said.
Capex, Hiring Plans Stay High
To meet strong demand, plans to spend more on machinery and equipment and to hire over the next 12 months “continue to be widespread.” Firms are seeking to use digital technologies and automation to ease the impact of labor shortages. They are also investing to alleviate physical capacity bottlenecks or address transportation and logistics challenges.
The index showing based on percentage of firms expecting higher investment spending minus the percentage expecting lower capex stood at 42 in the first quarter, down slightly from a record high of 47 seen in the fourth quarter. The index calculated from percentage of firms expecting higher employment levels minus the percentage expecting lower employment levels fell to 63 from a record high of 77.
Higher Wages Ahead
Firms’ expectations for average wage increases “remain well above usual levels,” and reports of higher expected wage growth are “pervasive.”
The index based on percentage of firms expecting higher labour cost increases minus the percentage expecting lower labour cost increases was 68 in the first quarter, compared to a record high of 71 in the previous quarter. The average expected year-on-year increase in wages for the next year surged to 5.2% in the first quarter from 4.8% in the fourth quarter.
The upward pressure on wage growth continues to come from tight labour markets that are making it difficult to attract and retain employees, the higher cost of living and an increasing need to keep pace with rapidly changing labour market expectations
Firms Price Outlook Remains High
Firms’ inflation expectations remain elevated, the survey showed. More than two-thirds (70% in Q1 vs. 67% in Q4) of businesses anticipate inflation will be above 3%, on average, over the next two years, while two-fifths expect it to be above 4%. Less than one-fifth of businesses expect inflation to stay well above the bank’s 2% target three years from now.
The latest survey showed 35.3% of respondents expect inflation to stay substantially above 2% for two to three years, up from 31.3% in the previous survey, while 34.1% see the situation will last for a year to two years, down from 38.6% previously.
“That is, most firms anticipate inflation will be high in the short to medium term but then decline,” the bank said. “Businesses generally see inflation’s return to target as the result of expected interest rate actions by the bank and improvements in supply chains as the impacts of the pandemic fade.”
Consumers See Short-Term Spike in Prices
The BOC’s quarterly Canadian Survey of Consumer Expectations showed that short-term inflation expectations have reached record-high levels.
“Many survey respondents think inflation will be higher over the next two years because of supply disruptions and the Covid‑19 pandemic,” the bank said.
The online survey was conducted from Feb. 2 to Feb. 22 and follow-up telephone interviews were conducted by the market research firm Nielsen on behalf of the bank from March 7 to March 11.
“Most believe that supply issues will impact inflation for at least two years and will impede authorities’ ability to control inflation. Consumers think the Russian invasion of Ukraine will make high inflation worse,” the bank said.
However, the bank also noted that longer-term expectations have remained stable and are below pre-pandemic levels. “This suggests that long-term inflation expectations remain well anchored and that survey respondents believe the current rise in inflation will not last,” it said.
The latest survey showed that one-year ahead inflation projections among consumers hit another survey high of 5.07%, up from 4.89% in the previous poll.
Two-year inflation expectations also rose to a fresh high of 4.62% from 4.12% while five-year forecasts eased to 3.23% from 3.5%.
Workers believe their wages will increase “only modestly” despite surging consumer inflation. Consumers expect higher borrowing costs, but also continue to anticipate strong spending growth on a broad range of goods and services.