Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud

Bottom line

The Bank of Canada’s Business Outlook Survey shows that business confidence is at its strongest on record, as demand remains strong. However, it also shows that most firms face significant constraints to their sales, mainly resulting from labour shortages and supply-chain issues. In an effort to ease those bottlenecks, hiring and investment intentions are elevated.

Moreover, the survey indicates rising inflation expectations. In addition, a high proportion of firms expect to increase wages over the next year to attract and retain workers, and provide some cost-of-living adjustments. Many firms also expect to increase their prices over the next year, passing the increased cost of inputs to customers.

Overall, the report shows that supply chain issues and labour shortages are major constraints on economic activity. In addition, the combination of solid demand and supply bottlenecks are expected to continue to put upward pressures on economic activity. While this report is another indication that the Bank of Canada (BoC) should consider increasing its policy rate soon to contain inflation expectations, the impact of the Omicron-wave remains uncertain and is likely to lead to a temporary pause in the recovery. With this uncertainty on the near-term outlook, we believe the BoC is unlikely to hike rates at its January meeting.

Business sentiment improved to its highest level on record. The release of the Bank of Canada’s Business Outlook Survey for 2021Q4, an important input in the BoC’s rate decision process, shows a continued improvement in business sentiment, increasing to 5.99, from 4.56. The survey was conducted during the second half of December, before the start of the Omicron-wave of COVID infections and the imposition of new restrictions by many provincial authorities.

The details show that future sales indicators, including order book, advance bookings, sales inquiries, etc.,  improved to 57, remaining close to its highest level on record. However, the expected growth in sales volume was more subdued. This indicates that demand remains strong but that businesses expect supply-side issues to continue to constrain the level of sales.

Hiring intentions are at a record-high level, with 77% of firms on balance saying they expect their level of employment to be higher over the next 12 months. As such, 40% of firms report that labour shortages are holding back their sales, with almost 75% of businesses reporting an intensification of the labour constraint.

Capital expenditures are expected to increase over the next 12 months, with 47% of firms saying they intend to increase investment over the next year. The strong investment intentions are broad-based across sectors and regions and directly result from continued supply constraints.

The share of firms reporting some or significant difficulty to meet an unexpected increase in demand rose to 77%, its highest on record. As such, 59% of firms report that labour constraint is an important bottleneck, while 41% mentions supply-chain issues are major bottlenecks.

With inflation remaining high and supply-issues persisting, inflation expectations have increased, with 67% of firms expecting inflation to be above 3% over the next year. Businesses note that the main driver of inflation are: supply-chain disruptions, prices for gasoline, energy and food staples, and the impact of monetary and fiscal policies. In addition, 71% of the firms expect labour cost to increase over the next 12 months. Those wage increases are seen as necessary to attract and retain workers and to allow for cost-of-living adjustments. As a result, a greater share of firms expect to pass increasing input cost to their customers over the next 12 months.

Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.