Canadian business and consumer confidence continued to improve through the latest round of COVID-19 pandemic restrictions, setting the stage for a hiring and spending spree over the summer that could add fuel to the economic rebound while putting upward pressure on wages and consumer prices.
A Bank of Canada quarterly survey conducted in May found most businesses across all regions and sectors plan to hire additional workers to meet an expected surge in demand for products and services. A separate survey of consumers found fears of losing a job fell sharply in the second quarter, while expectations of finding one recovered to close to prepandemic levels.
The results of the two quarterly surveys, published Monday, highlight the improving economic outlook as vaccination rates rise and pandemic-related restrictions are lifted. Business plans for capital investment are widespread, and indicators of future sales, including order books and sales inquiries, have improved markedly.
“All but a few firms feel the uncertainty related to the pandemic is behind them,” the central bank said in its Business Outlook Survey report. The bank interviewed about 100 companies in the second half of May.
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At the same time, the business survey points to emerging capacity constraints. Many companies are facing supply-chain bottlenecks, leading to higher input costs, and some anticipate a shortage of skilled labour as they increase production to meet growing demand.
Around 60 per cent of businesses said they would have “some difficulty” or “significant difficulty” meeting an unexpected increase in demand or sales. The number of companies currently reporting labour shortages remains low, but expectations of shortages are rising, and there are more reports that pressures in the labour market are intensifying.
The survey results will help shape the Bank of Canada’s view of the economic recovery and health of the labour market ahead of its interest rate decision next week. The bank is widely expected to taper its pace of federal government bond buying for the second time since April, further reducing the emergency stimulus it launched in the early months of the pandemic.
On the key question of inflation expectations, the surveys paint a mixed picture.
A record high 49 per cent of businesses expect labour costs to increase at a faster pace over the next 12 months than over the past year, and many companies said that increased freight costs and higher commodity prices are driving up input prices. More than one-third of businesses expect Consumer Price Index inflation to remain above 3 per cent over the next two years.
Consumer worries about near-term inflation also increased. The average one-year view on CPI inflation rose to 3.1 per cent in the bank’s latest Survey of Consumer Expectations, up from 2.1 per cent in the previous report.
At the same time, consumers and businesses expect inflation to moderate over the medium term. More than half of the respondents to the business survey believe price increases for their own products will moderate to prepandemic levels after the next year.
“From the BoC’s perspective, stronger capacity pressures, inflation and wage growth expectations should indicate tightening business conditions on the near-term horizon. Still, both businesses and consumers seem to expect that inflation pressures won’t persist, at least for now,” Bank of Montreal economist Shelly Kaushik wrote in a note to clients.
When it comes to spending, the consumer survey found that people are eager to spend their pent-up savings when pandemic restrictions are loosened. On average, respondents who accumulated extra savings during the pandemic plan to spend about 35 per cent of these funds over the next two years.
“Despite the challenging quarter marked by job losses, households remained resilient – with strong spending intentions and home buying plans,” Toronto-Dominion Bank economist Ksenia Bushmeneva wrote in a note.
“While income and wage growth expectations remain relatively modest, consumers have accumulated significant savings and wealth gains during the pandemic and are expecting to use those to support their spending in the months ahead,” she said.
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Mark Rendell