Results of the third-quarter 2024 survey | Vol. 21.3 | October 11, 2024

The Business Outlook Survey was conducted by in-person, video and phone interviews from August 8 to 30, 2024. The Business Leaders’ Pulse is conducted online every month; this report presents results from July, August and September 2024.

Overview

• Businesses continue to experience muted inflationary pressures: demand is weak, firms have excess capacity, and price growth continues to slow. These pressures are little changed from last quarter.
• Firms reported weak past sales growth due to past inflation and interest rate increases continuing to weigh on the economy, particularly on consumers’ budgets. Sales expectations remain softer than average but have improved slightly this quarter because of recent interest rate cuts and firms’ anticipation of further cuts.
• Subdued demand has allowed capacity pressures to ease. Only a small number of firms reported binding labour shortages, and firms generally reported an improved ability to find suitable labour if needed. Since most firms feel appropriately equipped to meet current and anticipated levels of demand, their investment and hiring plans are modest.
• Expectations for growth in wages, input costs and selling prices have continued to normalize as demand has slowed and inflation has come down. Expectations for inflation have also eased.

Business conditions remain subdued

The Business Outlook Survey (BOS) indicator—a summary measure of questions in the BOS—continued to be lower than usual in the third quarter of 2024 because of weaker-than-average demand indicators, slowing price and cost growth, and easing capacity pressures (Chart 1). However, it has become gradually less negative over the last four quarters as demand indicators have improved slightly, the paces of wage and price normalization have slowed, and credit conditions have eased. Firms largely attribute the improvements in demand indicators this quarter to the two interest rate cuts that took place before the time of the survey and the expectation of further cuts. Additionally, fewer firms are planning for a recession in Canada over the coming year (16% this quarter compared with 20% last quarter).

When firms were asked directly about business conditions, they said conditions remained subdued and stable. Business sentiment has stayed at a relatively low level since February 2024 (Chart 2). Firms continued to report the following concerns weighing on business conditions:

• still-high interest rates
• soft demand
• ongoing high costs of goods and services
• uncertainty about domestic and global economic conditions
• taxes and regulations

Chart 1: Widespread softness is keeping the BOS indicator negative

Chart 2: Business sentiment remains subdued

Sales growth expectations improved but remain soft

Demand is still weaker than average, but forward-looking indicators improved slightly in the third quarter. Firms noted that high interest rates have continued to weigh on sales over the past year, particularly for firms linked to discretionary consumer spending. Businesses also reported that customers are choosing cheaper options and said discounts are becoming necessary to attract an increasingly budget-constrained consumer. Meanwhile, firms’ indicators of future sales (e.g., order books, advance bookings and sales inquiries) have improved slightly compared with those same indicators one year ago (Chart 3, red line). But the balance of opinion remains lower than normal: the share of firms reporting improved indicators is only marginally larger than the share reporting deteriorated indicators. Similarly, businesses think sales growth will strengthen over the coming year (Chart 3, blue bars). This result is driven by a change in firms’ expectations for interest rates since last quarter. Those surveyed this quarter think interest rates will decline by more over the coming year than those surveyed last quarter did.

Chart 3: Demand is weak but future expectations are more optimistic

Excess capacity is leading to restrained investment and hiring

With demand remaining soft this quarter, once again few firms reported binding capacity constraints. Lingering supply chain issues are having only minor impacts on firms. Businesses mentioned labour shortages more often than supply chain issues, but fewer than normal reported that a lack of workers is holding back sales (Chart 4, yellow line). Moreover, firms continued to note an improved ability to find suitable labour if needed (Chart 4, green line). They indicated that labour shortages are considerably less intense than they were one year ago, alleviated by recent weak sales and increased labour supply. Firms pointed to high levels of immigration increasing the supply of labour. They generally described remaining shortages of labour as structural in nature (e.g., for specific occupations or in remote or rural areas).

Chart 4: Few firms report labour challenges

Given eased capacity pressures, plans for investment are modest (Chart 5, blue line). Firms’ intentions to invest over the coming year remain broadly unchanged at levels below their historical average. Planned investments are focused mostly on replacing or repairing equipment rather than on expanding production or improving efficiencies. Some firms said they are holding off on more significant investments until they see signs of stronger demand, reduced uncertainty or lower financing costs. Businesses reported that lending conditions (e.g., spread over prime, collateral requirements and receptiveness to new debt) eased for the first time in several quarters but that the current cost of financing is still restricting investment.

Chart 5: Investment and hiring intentions remain weak

Hiring intentions are also mostly unchanged and remain slightly weaker than average (Chart 5, red line). Businesses reported being appropriately staffed for their current and anticipated levels of demand. Thus, a larger-than-normal share of firms intend to keep their employment levels stable over the coming year. The share of firms planning layoffs is near its historical average and largely unchanged from last quarter, but firms point to some risk that hiring might be weaker than expected. They often attributed cautiousness around hiring plans to general pessimism around sales growth prospects, mostly stemming from soft consumer spending.

Firms expect wage and price growth to soften

Most businesses anticipate that wage growth will slow over the next 12 months, though the average expected wage increase is broadly unchanged from last quarter (Chart 6). Nearly two-thirds of firms now consider their wage adjustment plans to be within their normal range. Wage decisions continue to be driven by the push to catch up to cost-of-living increases, including through new union contracts. But firms expect much less pressure from these forces in the future.

Chart 6: Firms expect wage growth to moderate gradually

Firms continue to expect slower growth in input prices, largely because of weaker prices for commodity and non-commodity goods. They also expect growth in their selling prices to ease further, mostly because of weakness in demand and increased competition (Chart 7). The pass-through of previous wage increases is still affecting pricing decisions, although to a lesser degree than last quarter. The share of firms planning to make larger or more-frequent-than-normal price increases declined again this quarter.

Chart 7: Businesses continue to expect the growth in their input and selling prices to slow

Firms’ expectations for inflation have moderated for all time horizons and have converged to around 2.5% (Chart 8). Businesses noted that two factors are putting equally important downward pressure on their inflation expectations:

• tight monetary policy, despite recent interest rate cuts
• ongoing weakness in demand

Moreover, nearly two-thirds of firms expect inflation to be between 2% and 3% over the next two years (Chart 9). Of these, half predicted that it will return to 2% in the next 12 months.

Chart 8: Firms expect inflation to be within the Bank of Canada’s target range at all horizons

Chart 9: Most firms expect inflation to be between 2% and 3% over the next two years

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).