— Survey Conducted Nov. 15-Dec. 6, Before Surge in Omicron-Led Covid Cases
— 67% of Firms in Canada See Above 3% Inflation Over 2 Years Vs. 45% in Q3
— BOJ Nov Consumer Survey: More Concerned About Inflation, Hard To Control
By Max Sato
(MaceNews) – Sentiment among companies in Canada continued improving toward the end of the year, just before a global spike in Omicron-caused Covid cases, while more firms reported supply chain disruptions and labor shortages would limit their sales, the Bank of Canada’s quarterly Business Outlook Survey released Monday showed.
The central bank is widely expected to start raising interest rates to help guide inflation lower in the second quarter of the year.
The BOC’s business sentiment indicator continued rising to 5.99 in the final quarter of 2021 from 4.56 in the third quarter, 3.66 in the second quarter and minus 2.43 in the first quarter and 1.02 in the fourth quarter of 2020.
In the latest survey, about half of the increase came from upward pressures on capacity caused by supply chain bottlenecks and labor shortages during the pandemic, while reopening demand also pushed up the indicator.
The bank noted that the latest survey was conducted by phone and video conference from Nov. 15 to Dec. 6, 2021, just before the Omicron variant triggered widespread infections around world.
Stronger Demand; Higher Costs, Sales Prices Expected
“Overall, a broadening set of firms saw a solid recovery in sales supported by strengthening domestic and foreign demand,” the bank said. “As restrictions on in-person activities eased, sales for businesses providing hard-to-distance services improved but are still below pre-pandemic levels.”
On the downside, more firms reported the drag from labor shortages and supply chain disruptions on their sales. Reports of capacity pressures were “widespread,” the bank said.
On the upside, in response to capacity pressures, most businesses across sectors and regions plan to increase investment and raise wages to compete for workers and retain staff, the bank noted. Many firms also expect selling prices to rise in the next six months because of supply constraints.
Businesses expect most input prices to continue rising at roughly the same rate as last year, when growth was strong.
“The broad improvement in demand conditions is allowing firms to include these higher input prices and wages in their selling prices,” the bank said. This should support corporate profits but it could also dampen spending by struggling households.
More Firms See High Inflation
Inflation expectations for the next two years continued rising, the business survey showed. “Most firms expect currently elevated pressures on inflation to ease and inflation to return close to the bank’s 2% target in one to three years,” the bank said.
Expectations for total consumer price index inflation have moved up further, with two-thirds (67%) of firms now expecting inflation to be above 3% over the next two years, up from 45% in the third quarter, 35% in the second quarter and just 13% in the first quarter of 2021. The share of firms forecasting 2% to 3% inflation over the next two years fell to 30% in the fourth quarter from 42% in the previous quarter.
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.
Consumers Worry About Inflation
The BOC’s quarterly Canadian Survey of Consumer Expectations, which was conducted mainly in November before the Omicron scare and released Monday, showed that many people project inflation will remain high over the next two years because of supply disruptions.
The latest survey showed that one-year ahead inflation projections among consumers surged to a survey high of 4.89% from 3.72% in the previous poll released in October. Two-year inflation expectations also jumped to a survey high of 4.12% from 3.06% while five-year forecasts showed a slower rise to 3.5% from 3.09%, remaining below the pre-pandemic average.
“They are more concerned about inflation now than they were before the pandemic and believe it has become more difficult to control,” the bank said.
At the same time, the bank said near-term inflation expectations are not feeding into longer-term expectations, repeating its view that “expectations remain well anchored.” This suggests the BOC could wait until around April before embarking on rate hikes.
“Canadians generally feel that once the pandemic ends, the Bank of Canada will be able to achieve its inflation target,” the bank said.
Although consumers anticipate significant price increases in the near term, they believe their wage increases will be relatively stable,” the bank said.
The BOC’s online survey on consumers for the fourth quarter of 2021 was conducted from Nov. 11 to Nov. 24. Follow-up telephone interviews were conducted by the market research firm Nielsen on behalf of the bank between Dec. 8 and Dec. 16.