Bank of Canada surveys suggest uneven COVID-19 recovery, even before second wave

Two quarterly Bank of Canada surveys show that business and consumer sentiment brightened over the summer but remained cautious – pointing to a “slow and uneven” economic recovery even before the recent surge in COVID-19 cases.

The Business Outlook Survey showed that while companies' expectations have improved from the deeply pessimistic readings in its previous survey conducted in late May and early June, the bank’s Business Outlook Survey Indicator remains in negative territory and well below its historical average, “signalling weak business sentiment.” One-third of businesses don’t expect their sales or their staffing levels to return to prepandemic levels in the next 12 months.

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Meanwhile, the Canadian Survey of Consumer Expectations showed that consumers' views brightened with the gradual easing of COVID-19 containment restrictions over the summer, but they remained “cautious” about the course of the pandemic, and about employment, income and spending prospects. They reported stepping up their savings, as a precaution against further economic difficulties.

The consumer survey was conducted over the last two weeks of August, while the business survey took place from late August to mid-September. Both surveys predate the sharp increase in COVID-19 cases in recent weeks, and resulting reinstitution of some containment measures in parts of the country.

“The overwhelming factor is, where does the virus take us, and how do governments respond? I think all forecasts have to be looked at through that lens,” Bank of Montreal chief economist Douglas Porter said.

But even without the recent pandemic resurgence, the surveys depict a caution that continued to hang over businesses and households as the summer wound down.

Companies' plans for investing in machinery and equipment over the next 12 months improved slightly, but remained well below normal, with more than one-third saying they expect their spending to decline. Similarly, hiring plans improved as the economy has bounced back, but they remained below historical norms.

The survey showed a narrowing of excess production capacity and labour slack as activities resumed in most sectors over the summer, with a significant increase in the number of companies reporting that they would face difficulty meeting an unexpected increase in demand. However, the Bank of Canada cautioned that some of this appears to be temporary, related to supply-chain delays stemming from pandemic-containment requirements.

For the first time, the Bank of Canada included a reading of companies' wage expectations in their survey report. The indicator showed that 41 per cent of businesses expect growth in their hourly wages to slow in the next 12 months, compared with only 20 per cent anticipating faster growth.

Throughout the bank’s business survey, there is a distinct split between businesses hit hard by the pandemic restrictions and those largely unaffected. Much of the pessimism is tilted toward the tourism and hospitality industry and related businesses, the bank said.

Regionally, the overall business sentiment indicator improved in all parts of the country compared with the June lows, but remained negative in all major regions. Sentiment was least pessimistic in Ontario, and most pessimistic in the Prairies.

“It was a rebound to be expected, given the state of the economy back in the spring. Nonetheless, it would be misplaced to describe the current business outlook as optimistic,” National Bank of Canada economist Taylor Schleich said in a research note.

Still, Bank of Montreal’s Mr. Porter noted that the business survey’s overall sentiment levels are stronger and have rebounded more quickly than in the 2008-09 recession, despite a much deeper economic downturn in the current crisis.

“There is the view that this is temporary, and the underlying economy is better than it was in 2008-2009,” Mr. Porter said.

The consumer survey showed a substantial split by age in employment expectations. Younger workers (ages 18-24) are far less optimistic about a quick return to full working hours than workers in the 25-55 age group, the Bank of Canada said.

“If these expectations are correct, younger workers could face the risk of longer-lasting economic damage (e.g. loss of work experience) from being out of the labour force for longer,” it said.

Consumers' expectations for wage growth remained below prepandemic levels, as well as below their expectations for inflation. However, the central bank noted that consumer inflation expectations eased back to their prepandemic level, after having spiked in the May-June survey amid shortages and price increases for some consumer items during the pandemic lockdowns. The bank said the retreat could reflect a “moderation” in concern about food prices, which tend to heavily influence consumer inflation perceptions.

Consumers' expectations for house price growth also recovered to near prepandemic levels, reflecting the rebound in the housing market over the summer, with average expectations of nearly 5 per cent over the next year. However, expectations in harder-hit regions remain less encouraging. For example, the bank noted that in Alberta, consumers expect home price growth of “near zero.”

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