Results of the fourth-quarter survey | Vol. 18.4 | January 17, 2022

In the fourth-quarter 2021 Business Outlook Survey, reports of supply chain bottlenecks and labour shortages remain elevated. Firms cited robust growth in demand, although those offering hard-to-distance services still had sales below pre-pandemic levels, even before the Omicron variant began spreading broadly. The combination of strong demand and bottlenecks in supply is expected to put upward pressure on prices over the next year.

Overview

• Interviews for the Business Outlook Survey (BOS) were conducted before the rapid increase in COVID‑19 cases due to the Omicron variant.
• Overall, a broadening set of firms saw a solid recovery in sales supported by strengthening domestic and foreign demand. As restrictions on in-person activities eased, sales for businesses providing hard-to-distance services improved but are still below pre-pandemic levels. The outlook for firms that fared well through the COVID‑19 pandemic remains robust.
• At the same time, more firms reported impacts from labour shortages and supply chain disruptions, including a continued drag on their sales. Reports of capacity pressures were widespread.
• In response to capacity pressures, most businesses across sectors and regions are set to increase investment and plan to raise wages to compete for workers and retain staff. Many firms also expect selling prices to rise in the next six months because of supply constraints.
• Inflation expectations for the next two years continued to increase. Most firms expect currently elevated pressures on inflation to ease and inflation to return close to the 2% target in one to three years.

Labour markets continue to tighten

Reports of tightening labour markets have increased. Roughly 4 in 10 firms see labour shortages as holding back their sales. Further, firms said the intensity of labour shortages across regions, sectors and many occupations continues to grow (Chart 1). They cited three main factors behind this labour market tightness:

• the strength of demand for labour
• structural issues such as the aging population and technological changes requiring additional skills
• increasing worker preferences for flexible working hours and the ability to work remotely

Firms expect that some of these factors may have a lasting impact, generating persistent tightness in labour markets. Businesses also pointed to other factors that have limited the supply of labour but that are beginning to ease. These are relatively short-term and pandemic-related, such as government income support programs and lower immigration levels.

Chart 1: About three-quarters of firms see labour shortages intensifying

* Percentage of firms reporting more intense labour shortages minus the percentage reporting less intense shortages

Reports of supply chain disruptions are elevated

A growing number of firms indicated that supply chain disruptions would limit their ability to meet increased demand (Chart 2). Bottlenecks in supply are resulting in a lack of:

• key production inputs
• goods available for sale
• access to markets for some exporting firms

These disruptions are holding back sales for about one-third of businesses. Firms again reported that supply chain issues are driven by the impacts of COVID‑19 in other countries, problems at ports and other logistical difficulties. The flooding in British Columbia has aggravated these supply chain issues. Where possible, firms are reacting by holding more inventory, particularly in the trade and manufacturing sectors.

Chart 2: Supply chain and labour bottlenecks continue to increase

* Mentions of a fully utilized labour force and an inability to find suitable new labour at the current wage are counted as labour bottlenecks. Mentions of raw material constraints, transportation difficulties and logistics issues are counted as supply chain bottlenecks. Firms could select more than one response.

Firms are uncertain about when these supply chain issues will be resolved. But many expect that it will take more than a year for supply chains to return to normal. They highlighted factors such as COVID‑19 variants and persistent shortages of inputs caused by global shipping constraints as risks that could lengthen the time to recovery.

Strength in demand has broadened

Survey results point to signs of a broadening recovery in demand. Indicators of future sales (e.g., order books, sales inquiries) to domestic and foreign customers remain elevated, suggesting strength in demand across most sectors and regions (Chart 3). Sales are expected to remain solid for most firms in sectors that have fared well during the pandemic, namely housing, retail and manufacturing. However, further growth in sales for other firms in these sectors is increasingly held back by supply-side constraints (Chart 4).

Chart 3: Most firms see improving indicators of future sales

* Percentage of firms expecting faster growth minus the percentage expecting slower growth
† Percentage of firms reporting that indicators have improved minus the percentage reporting that indicators have deteriorated

Chart 4: Lack of capacity and skills have become more prominent constraints on firms' sales

* Share of exporters

Firms hit hardest by the pandemic—such as those in hospitality, tourism, travel and commercial real estate—were recovering as a result of easing health restrictions and vaccine rollouts over the summer and autumn. Nevertheless, before the increase in COVID‑19 cases due to the Omicron variant, one-third of businesses reported sales below pre-pandemic levels, including all firms in hard-to-distance service sectors. Although consumers were feeling more confident about travel, some businesses believed a further lifting of restrictions was needed before they would see a meaningful pickup in demand. This was particularly true for segments that were still far from recovery, such as international and business travel. Faced with labour shortages, some firms may take longer than previously anticipated to fully recover, even as demand rises.

Capacity pressures are present for most firms

Reflecting broadening demand and ongoing supply constraints, reports of pressures on productive capacity are widespread. More than three-quarters of firms said they would have difficulty meeting an unexpected increase in demand (Chart 5). For many, these pressures are significant and are reducing firms’ ability to sell. Although some of the supply issues should be temporary, it was often noted by firms that they expect this situation to persist for more than six months. Most businesses—including some in hard-to-distance service sectors—see labour shortages and supply chain disruptions as the primary source of capacity pressures. But in sectors that experienced strong demand during the pandemic, such as housing and retail, higher demand was also sometimes cited as a major driver of capacity pressures.

Chart 5: Reports of capacity pressures continue to climb

Strong demand and capacity pressures support solid investment intentions

With binding capacity pressures and increases in sales, most firms plan to spend more on machinery and equipment compared with one year ago (Chart 6). Positive investment intentions are broad-based across sectors and regions and in many cases include spending on buildings and structures. Credit conditions are supportive of investment, although firms believe that prime rates on their borrowing will increase in the next six months. Guided by longer-term opportunities, some businesses reported the need to proceed with investments that had been delayed by the pandemic to ensure they are well equipped through the recovery and in the post-pandemic environment. More intense labour shortages and difficulties attracting and retaining workers are leading some firms to expand investment in digital technologies and automation.

Chart 6: Plans to invest are widespread

* Percentage of firms expecting higher investment minus the percentage expecting lower investment

While the investment outlook of most firms is encouraging, the negative effects of ongoing supply chain disruptions are expected to weigh on spending plans for some. For example, a few businesses cited long delays for the delivery of new trucks, heavy equipment and other industrial machinery as a source of uncertainty that is holding back their investment.

Wages are increasing as firms plan to hire in tighter labour markets

Intentions to hire in the next 12 months have risen and remain widespread. The majority of firms across all regions and sectors plan to increase staffing levels (Chart 7). Three-quarters of businesses reported that their employment levels have fully recovered from the pandemic. Many businesses are now hiring more staff to accommodate higher domestic and foreign demand or alleviate labour-related capacity pressures. While most firms hope that they will be able to find the workers they need, some are unsure. In certain cases, labour market tightness is discouraging them from hiring and is hampering their recovery.

Chart 7: Most firms plan to hire more staff to meet demand and ease capacity issues

* Percentage of firms expecting higher levels of employment minus the percentage expecting lower levels

This broad-based demand for workers is putting upward pressure on wages. A strong majority of firms intend to raise wages at a faster rate in the next 12 months (Chart 8). Firms, on average, also reported planning for larger wage increases. As labour shortages have intensified, the need to attract and retain workers has become the main driver of wage pressures (Chart 9). Reports of wage competition among firms have picked up and are present in most regions and sectors. They are particularly prominent in highly skilled occupations and in the technology sector. The cost of living is increasingly contributing to wage pressures as well. Some firms noted that they now plan to catch up on wage increases after having a limited ability to raise wages earlier in the pandemic.

Chart 8: Upward pressures on wages are widespread

* Percentage of firms expecting higher labour cost increases minus the percentage expecting lower labour cost increases

Chart 9: Firms plan to increase wages mainly to attract and retain staff

* Percentage of firms that mentioned positive wage pressure. Firms could select more than one response.

Firms are adjusting their selling prices in response to increases in costs

Businesses expect most input prices to continue rising at roughly the same rate as last year, when growth was strong (Chart 1, red bars). The broad improvement in demand conditions is allowing firms to include these higher input prices and wages in their selling prices (Chart 1, blue bars). This is resulting in plans for robust growth in output prices. In many cases, these increases were delayed throughout the past year because of heightened uncertainty related to the pandemic. Firms also plan to pass through costs related to recent supply constraints, and many aim to do so over the next six months. This is particularly the case in the manufacturing and trade sectors. After solid growth in the past year, some commodity prices—such as those for lumber, metals, energy and some agricultural products—are not expected to put the same upward pressure on input costs and output prices.

Chart 10: Strong and stable growth of input and output prices is expected

* Percentage of firms expecting greater price increases minus the percentage expecting lesser price increases

Inflation expectations are elevated

Expectations for total consumer price index inflation have moved up further, with two-thirds of firms now expecting inflation to be above 3% over the next two years (Chart 1). As in the previous survey, businesses noted several factors driving higher inflation, including:

• supply chain disruptions
• prices for gasoline, other energy products and food staples
• the impact of expansionary monetary and fiscal policies

Upward wage pressures on inflation were also cited more frequently, particularly by firms that anticipate inflation will remain above the target of 2% over a longer period. That said, in response to a special question, most firms said they expect currently elevated inflationary pressures to dissipate over time, with inflation returning close to target in one to three years.

Chart 11: Two-thirds of firms anticipate inflation above 3%

The BOS indicator moved up again, supported by tightening capacity and broadening demand

The BOS indicator is a weighted average of individual indicators that are derived from several different questions. It rose again this quarter, partly because of improvements in sales indicators and firms’ intentions to expand investment and hiring (Chart 1, yellow bars). Capacity pressures also contribute to the BOS indicator, explaining most of the increase since the beginning of 2021 (Chart 1, blue bars). Historically, stronger capacity pressures were typically caused by high demand and suggested an increase in business activity ahead. But currently these pressures are driven largely by supply chain bottlenecks and tightening labour markets. The recent high level of the BOS indicator therefore reflects a complicated business environment in addition to heightened business confidence.

Chart 12: Capacity pressures have driven the BOS indicator higher in the last three quarters

* The BOS indicator is a summary measure of the main survey questions that gauges overall business sentiment.

The Business Outlook Survey summarizes interviews conducted by the Bank’s regional offices with the senior management of about 100 firms selected to reflect the composition of the gross domestic product of Canada’s business sector. This survey was conducted by phone and video conference from November 15 to December 6, 2021. The balance of opinion can vary between +100 and -100. Percentages may not add to 100 because of rounding. Additional information on the survey and its content is available on the Bank of Canada’s website. The survey results summarize opinions expressed by the respondents and do not necessarily reflect the views of the Bank of Canada.