Results of the second-quarter 2024 survey | Vol. 21.2 | July 15, 2024

The Business Outlook Survey was conducted by in-person, video and phone interviews from May 9 to 29, 2024. The Business Leaders’ Pulse is conducted online every month; this report presents results from April, May and June 2024.

Overview

• Firms’ sales outlooks are mostly unchanged from last quarter and remain more pessimistic than average. Businesses tied to discretionary spending reported particularly weak sales expectations, while those tied to essential spending see population growth continuing to benefit their sales.
• Investment spending plans also remain below average. Weak demand, elevated interest rates, uncertainty about the business environment and the high cost of machinery and equipment were cited as discouraging investment. In this context, investment spending has become increasingly concentrated on upkeep and repair rather than expansion or improvements in productivity.
• The share of firms reporting labour shortages is near survey lows. Still, few firms plan to reduce headcounts. Businesses attribute easing labour market conditions to a weaker economy and to rapid population growth.
• Businesses expect the growth of their input prices and selling prices to slow, suggesting that inflation will continue to decline over the coming year. Most firms that made abnormally large price increases in the past 12 months do not plan to do so again in the coming year.
• Firms’ expectations for inflation fell in June and are now in the Bank of Canada’s inflation-control range.

Business conditions remain subdued

After recovering from the lows seen in late 2023, business sentiment remained relatively flat in the second quarter of 2024 (Chart 1). When discussing factors weighing on business sentiment, firms mentioned:

• elevated interest rates
• weak demand, particularly for non-essential goods and services
• ongoing high costs

At the same time, though, the share of firms planning for a recession in Canada in the coming 12 months continued to decline (Chart 2).

Chart 1: Business sentiment is still low

Chart 2: Fewer firms are planning for a recession

Uncertainty and cost pressures remain firms’ most frequently mentioned concerns (Chart 3). The sources of uncertainty noted most often were domestic factors, such as economic growth, costs, interest rates and tax policies. This uncertainty is contributing to businesses’ modest investment plans.

The share of firms citing taxes and regulation as one of their top concerns increased sharply this quarter. Firms mentioned red tape and regulations as slowing their plans, and taxes, predominantly the carbon tax, as increasing their costs.

Meanwhile, capacity pressures—namely labour shortages and supply chain challenges—have continued to decline in importance over the past two years. And for the first time since the start of 2023, demand has become less of a concern.

Chart 3: Firms’ top concerns have shifted toward tax policies and regulations

Sales growth expectations are still weak

Firms reported below-average sales growth over the past 12 months and continue to expect soft demand going forward. Businesses’ indicators of future sales (e.g., order books, advance bookings, sales inquiries) are largely unchanged over the past four quarters, with the balance of opinion remaining historically low (Chart 4, red line). Further, on balance, firms expect no change in the pace of their sales growth (Chart 4, blue bars). At the time of the survey (before the Bank reduced the policy interest rate on June 5), businesses said they see interest rate cuts ahead—a view increasingly widespread among firms. Most said they expect rates to decline by 0.5–1.0 percentage points in the next 12 months. But they noted they still see the interest rate environment as weighing on their sales outlooks.

Chart 4: Firms’ sales indicators remain subdued

Firms tied to discretionary spending reported declining indicators of future sales (Chart 5, red line). This echoes results from the Canadian Survey of Consumer Expectations—Second Quarter of 2024, which finds that consumers’ plans to cut spending are still widespread. Roughly one-third of firms selling consumer discretionary goods and services expect declines in their sales in the next 12 months. They noted that consumers are price-sensitive, often:

• trading down to less-expensive products
• looking for discounts before deciding to purchase

Still, despite signals of weakness in firms’ sales outlooks, there are some pockets of strength. Firms tied to consumers’ essential spending said that population growth, often linked to immigration, is supporting their sales indicators (Chart 5, blue line). Further, firms related to industrial and heavy civil construction expect sales to pick up after having experienced several quarters of weakness. These construction firms mentioned demand coming from infrastructure projects in the tech and public sectors. In some cases, easing labour shortages are allowing delayed projects to move forward. After a period of weak sales, firms linked to residential real estate anticipate interest rate reductions will boost sales in the year ahead. But their expectations for rate cuts are modest and lower than what they think is needed for a substantial increase in housing demand, supply and prices.

Chart 5: Sales indicators have deteriorated for firms tied to discretionary consumer spending

Against the backdrop of weak demand, firms’ capacity pressures eased and returned close to their historical average (Chart 6). Only a small share of firms said they are currently experiencing significant difficulties. Easing labour shortages are widespread. Reports of supply chain bottlenecks continue to decline, although firms still noted some challenges. Most often, lingering supply issues are related to long lead times and shortages of inputs, and firms usually characterize the impacts of these issues as minor. Few firms mentioned concerns about shipping disruptions.

Chart 6: Capacity constraints have returned close to their historical average

Firms’ intentions to invest in machinery and equipment ticked up but are still below their historical average (Chart 7, blue line). Repairing and replacing existing capital equipment rather than investing in new capacity or products to improve productivity remains the primary motivation behind investment spending. The main factors weighing on firms’ investment plans are:

• uncertainty about the economy and business conditions
• taxes and regulations
• the cost of capital goods and financing

In addition, fewer firms than usual see demand conditions as supporting investment. Given their expectations for modest sales growth, firms characterize the return on their investment as uncertain. In some cases, businesses are waiting to see improvements in their sales before investing. Some firms reported that investments related to digitalization (including artificial intelligence) and green initiatives are contributing to their investment spending. But spending on these projects tends to be small.

Chart 7: Weak demand is holding back firms’ plans to invest and hire

Firms’ employment outlooks are also below their historical average (Chart 7, red line). In this environment of weak sales expectations, half of businesses are planning to maintain the size of their workforce. Even among firms that anticipate sales increases, around 40% are not planning to add workers. For some, this is because they are uncertain that higher sales will materialize. The share of firms planning to reduce staff levels remains modest.

Few firms face labour shortages

Businesses across all regions and sectors reported that the labour market has continued to ease. The share of firms citing labour shortages is near survey lows (Chart 8, blue bars). For the sixth consecutive quarter, firms noted the intensity of labour shortages had lessened compared with 12 months ago (Chart 8, red line). Businesses said this widespread easing is driven by:

• soft sales expectations, leading to less demand for additional workers
• an increased supply of workers due to immigration

The labour shortages that do remain are mostly related to structural issues in certain parts of the labour market, such as specialized skills and remote locations.

Chart 8: Labour markets continue to ease

Given this widespread easing in the labour market, firms’ expectations for wage increases in the next 12 months have softened. The average expected wage increase in the next 12 months has declined significantly (Chart 9, red line). An increasing share of firms expect the pace of wage growth to slow in the next 12 months (Chart 9, blue bars). On balance, firms no longer see a need for higher wages to attract or retain workers. Notably, firms see less pressure on wages from:

• cost-of-living increases
• a need to raise wages to match the market wage

Moreover, firms said their own performance and profitability continues to be a constraint on their wage increases. Still, the average wage point estimate is slightly above its historical average as new union contracts come into effect and some pass-through of previous cost-of-living increases continues.

Chart 9: Wage growth expectations have declined significantly

Firms expect price growth to slow

Expectations for slower growth in input prices continue to be common among businesses but are less widespread than in late 2023 (Chart 1). Firms also expect growth in their selling prices to continue easing. Downward pressure on selling prices is often attributed to:

• slowing growth in costs, particularly wages
• weakness in demand, leading to increased competition

Chart 10: Businesses expect the growth of their input prices and selling prices to slow

The share of firms planning larger-than-normal price increases remains well below its 2023 average, and more firms expect to keep prices flat. In the second quarter, the share of firms planning to make larger-than-normal price increases edged up (Chart 1, yellow bars). This remains considerably lower than the share of firms that made abnormally large price increases over the past 12 months (Chart 1, blue bars). A roughly stable share of firms reported they are making unusually frequent price increases.

Chart 11: The share of firms planning to make abnormally large price increases remains smaller than the share that made past large increases

Firms’ inflation expectations are inside the Bank’s inflation-control range. In the Business Outlook Survey, firms’ expectations for inflation over the next two years are roughly unchanged in the second quarter (Chart 1, red line). However, recent Business Leaders’ Pulse results show monthly expectations for inflation one year ahead fell sharply in June after increasing earlier in the quarter (Chart 1, blue line). Businesses noted that the following factors played a key role in their expectations for inflation:

• monetary policy, which they continue to cite as putting downward pressure on inflation
• demand, which was long seen as keeping inflation elevated, is now seen as weighing negatively on inflation

In contrast, fiscal policy and housing continue to be seen as fuelling inflation and driving some firms’ uncertainty about when inflation will return to the Bank’s 2% target. That said, most respondents expect inflation to return close to the target within two to three years.

Chart 12: Inflation expectations have been generally flat quarter over quarter

Survey results report opinions expressed by the respondents and do not necessarily reflect the views of the Bank of Canada.

The Bank of Canada’s Business Outlook Survey is conducted by the Bank’s regional office staff through interviews with the senior management of about 100 firms selected to reflect the composition of the gross domestic product of Canada’s business sector. Additional information on the survey and its content is available on the Bank of Canada’s website.

The Bank of Canada’s Business Leaders’ Pulse is a survey of 700 to 1,000 Canadian business leaders who respond to one of three short online questionnaires each month. For more information on the Business Leaders’ Pulse, see T. Chernis, C. D’Souza, K. MacLean, T. Reader, J. Slive and F. Suvankulov, “The Business Leaders’ Pulse—An Online Business Survey,” Bank of Canada Staff Discussion Paper No. 2022-14 (June 2022).