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Bank Of Canada Survey Reveals Canadians Are Worried Inflation Will Stay High For Longer

  • Many businesses continue to expect strong sales growth, but an increasing number of these firms expect the pace of growth to return to normal following a fast recovery from the pandemic. Some firms also anticipate that labour shortages will limit growth in their sales.
  • The number of businesses reporting labour-related constraints and supply chain bottlenecks remains at a record high, suggesting that supply is not keeping up with demand. About half of firms with supply chain challenges expect them to persist until the end of 2023 or beyond.
  • Supported by strong demand, many firms intend to increase their investment spending and add staff over the next year. A few businesses mentioned that the prices of capital goods along with rising interest rates may potentially affect the viability of their capital expenditure plans, but such factors are not yet holding them back.
  • As in recent surveys, many businesses anticipate significant wage and price increases. Pressures on input and output prices continue to be linked to supply chain issues.
  • Businesses’ expectations for near-term inflation have increased, and firms expect inflation to be high for longer than they did in the previous survey. Still, most see inflation returning to 2% over time. They noted various factors needed for inflation to return to target, including higher interest rates, improved supply chains, lower oil prices and a resolution of the war in Ukraine.
  • Consultations with firms and experts in the energy sector suggest that growth in capital expenditures will be robust but less than in previous commodity price booms.

The BOS indicator remains elevated amid increased uncertainty

The BOS indicator has stayed high in the second quarter (Chart 1). Businesses continue to view capacity pressures as elevated, and they expect wages and prices to grow at a faster pace. Improvements in firms’ sales indicators suggest ongoing sales growth ahead and support their plans to invest more and hire.

Increased uncertainty about the economic environment was an emerging theme in both the BOS and the BLP. The sources of uncertainty include the:

  • persistence of inflation, rising interest rates and the impact on demand
  • continuation of supply chain issues
  • ongoing war in Ukraine
  • evolution of the pandemic (including the return of demand for high-contact services, and the chance of another wave)

Most firms saw this uncertainty as creating risks to their outlook but not yet further affecting their operations or sales expectations.

Firms expect strong but somewhat slower sales growth

Expectations that sales growth will moderate are widespread (Chart 2, blue bars). Firms largely attribute this softening to a shift toward normal demand conditions—after an exceptionally rapid recovery from the pandemic for some. Still, these businesses continue to expect strong growth, supported by improved order books and increased sales inquiries from domestic and foreign customers (Chart 2, red line). Businesses with slowing sales growth are mainly linked to housing, natural resources and transportation. Some firms also anticipate that labour-related constraints will limit their sales growth.

Other businesses expect their sales to grow faster over the next year. These include firms that were hit hard during the pandemic, such as those tied to hard-to-distance services. They attribute their positive outlook to eased restrictions and pent-up demand.

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