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The Bank of Canada’s latest survey of businesses shows that business sentiment was improving heading into the latest round of lockdowns, with most companies reporting stronger investment and hiring plans.
The survey was conducted from mid-November to early-December, as COVID-19 cases were rising, but before the reimposition of strict lock-down measures in a number of 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 recovery remains uneven, with companies in “high-contact” industries, such as hospitality and tourism, reporting a less optimistic outlook. While most companies expect their sales to increase over the next year compared to the previous 12 months, one-third of companies, mostly in high-contact industries, do not expect their sales to return to pre-pandemic levels over the next year.
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 Bank of Canada’s rate decision next week, as the survey signals that there were rising 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. These challenges were most often related to the pandemic,” the bank said.
Companies also “cited growing upward pressure on supply chain costs, mostly related to shipping and freight fees. In addition, a number of firms reported faster cost increases for commodities and other inputs, including subcontracting fees,” the bank said.
Overall, the majority of businesses expect inflation to remain low over the next two years, with 60 per cent of respondents expecting inflation of between 1 and 2 per cent.
“Despite the recent surge in virus cases, much of the rationale for the optimism about the recovery over the full course of 2021 remain intact, particularly on the vaccine front,” said CIBC economist Royce Mendes in a note to clients about the survey.
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.
Labour market expectations continue to be weaker than pre-pandemic levels. While consumers reported slightly better prospects for keeping their jobs, expectations for finding a new job deteriorated. The reported likelihood of voluntarily leaving a job also decreased slightly, suggesting that people are unwilling to change jobs while uncertainty around the trajectory of 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 bank said.
The publication comes on the heels of a jobs report from Statistics Canada showing Canada’s labour recovery began to stall in December. Canada lost a net of 62,600 jobs in December, the first decline since April, with close-contact industries suffering the most. The unemployment rate edged up to 8.6 per cent from November’s 8.5 per cent.
Consumers did indicate that their spending would 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 inflation expectations declined.
“While both surveys were taken well-before the latest spike in virus cases and the associated necessary shutdowns, they suggest that businesses and households saw light at the end of the tunnel,” Mr. Mendes wrote.
“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,” he added.
