The Bank of Canada’s latest survey of companies shows that sentiment was improving heading into the latest round of lockdowns, with most businesses reporting stronger investment and hiring plans.
The quarterly Business Outlook Survey (BOS) was conducted from mid-November to early December, as the number of COVID-19 cases was rising, but before the reimposition of strict lockdown measures in several provinces over the holidays.
“Robust foreign demand, improved confidence related to vaccines and ongoing government relief programs all contribute to the improved outlook,” the bank said.
The economic recovery remains uneven, with businesses in “high-contact” industries such as hospitality and tourism reporting a less optimistic outlook. While most companies expect their sales to increase this year compared with the previous 12 months, a third do not expect their sales to return to prepandemic levels over the next year.
The central bank’s gauge of consumer sentiment, also published Monday, was less upbeat, with optimism around vaccine approval being balanced against a surge in COVID-19 infections across the country.
In the BOS, investment and hiring plans improved across all regions, with many companies reporting plans to invest in productivity-enhancing automation and digitalization.
“Among firms with positive hiring plans, about half expect to ramp up the size of their workforce later in 2021, when they believe the pandemic will be largely under control,” the bank said.
“Still, results point to the uneven and lengthy recovery of labour markets, as one-quarter of firms expect the size of their workforce to remain below pre-pandemic levels for at least another year,” it added.
With demand returning, companies in goods-producing sectors are starting to report supply constraints and an increase in input prices. This could factor into the central bank’s rate decision next week, as the survey signals that there were inflationary pressures before the second wave of lockdowns.
“Many goods-producing firms reported experiencing long wait times sourcing materials – for example, from the United States or Asia,” the bank said. Companies also cited increasing shipping fees, commodity prices and subcontracting fees.
Over all, the majority of businesses expect inflation to remain low over the next two years, with 60 per cent of respondents expecting a rate of between 1 per cent and 2 per cent.
The latest lockdown measures have led some economists to speculate in recent weeks that the bank could trim its key overnight rate on Jan. 20 with a so-called “micro cut.” The optimistic tone of the BOS, however, suggests policy changes are unlikely, wrote Andrew Kelvin, the chief Canada strategist at TD Securities, in a note to clients.
“Even if the bank decides that the BOS and [the consumer survey] are not timely enough to be useful, at the very least it would be difficult to draw a negative conclusion from either survey, as the slower recovery in the services sector is a well-worn narrative at this point,” he wrote.
In the consumer survey, labour-market expectations remained below prepandemic levels. People were slightly more optimistic about keeping their jobs, but prospects for finding a new job deteriorated. The reported likelihood of voluntarily leaving a position also decreased slightly, suggesting that workers are unwilling to change jobs while the uncertainty around the pandemic persists.
“If these concerns result in less turnover in the job market, that could lower the quality of job-worker matching, leading to lower productivity and weaker wage growth in the future,” the central bank said.
Consumers did indicate that their spending would likely increase, perhaps in response to optimism around vaccine development, even as expectations for income growth remained unchanged.
Short-term consumer expectations for inflation ticked up in the quarter, which may reflect an increase in gasoline prices, the bank said. Expectations for inflation over the next two years remained stable, while five-year expectations declined.
“The erosion of longer-term inflation expectations in the consumer survey might provide central bankers with a bit more cause for concern. But generally, the surveys taken on their own don’t point to any need by the Bank of Canada to take immediate action,” CIBC Capital Markets economist Royce Mendes wrote in a note to clients.
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Mark Rendell