October 19, 2020 | 13:51
BoC's BOS and Consumer Expectations Survey (2020 Q3) — Still a Long Way to Go
The Bank of Canada's Q3 Business Outlook Survey showed a broad-based rebound in sentiment following the prior quarter's pandemic-lockdown-driven plunge, though the various indicators remain below pre-pandemic levels. The survey was taken from late-August to mid-September, when cases were still pretty low and virus worries appeared to be ebbing at least a bit. Overall, the Business Outlook Indicator bounced 4.7 pts to -2.2, still quite weak overall, with only the prior quarter, the 2008/09 recession and late 2015 seeing worse readings. Importantly, the survey was taken before the recent increase in COVID cases and tightened regional restrictions. Indeed, virus-driven uncertainty was littered throughout the text.
Some details from the Q3 report:
Future sales growth surged to 39% (from -35% in the prior quarter), though the big improvement is due to the weak base. The indicators of future sales improved 24 ppts but remains very soft at -22%. There are signs of a K-shaped recovery in the text with firms split into those whose sales have already rebounded, those expecting sales to rebound over the next 12 months, and those who expected a much longer, more drawn out, recovery. Tourism and related industries were repeatedly highlighted as having a weak outlook throughout the BOS.
Investment intentions climbed to a still-weak 2% (from -30%) as uncertainty about the economy and pandemic is keeping firms spending conservatively. Indeed, it's tough to invest in future growth when the outlook is so cloudy. Those firms who are looking to invest are doing it with a long-term focus.
The reopening of the economy from lockdown increased capacity pressures, with the share of firms reporting that they would have some or significant difficulty meeting an increase in demand—the key capacity metric in this report—rising to 44%, from 27% in Q2. The pickup was driven by a couple of factors. Most notably, supply chain disruptions caused by the pandemic (and shutdown) made some production inputs harder to find, though this issue was flagged as likely to be temporary. On the labour front, "several firms attributed some of the difficulty finding labour to the Canadian Emergency Response Benefit." It's hard to believe the introduction of the CRB will change things on that front given the tax implications for workers. Despite the above, labour shortages increased only modestly, with the intensity of those shortages staying muted. Hiring expectations rose 4 ppts to 26%, an improvement, but to still-historically weak levels.
Inflation expectations perked up along with everything else. Just under half of firms (44%) expect inflation will be 1%-to-2%, with 12% expecting below 1%. The latter is down from a decade high 25% in the prior quarter. This time, the extreme went to the high end with 11% anticipating inflation above 3%, a nine-year high. The increase is partially due to pandemic-related costs (e.g. PPE), but there was also concern about the direction of fiscal and monetary policy. Meantime, input price expectations rose to 9%, as commodity prices rebounded. Output price expectations climbed 20 ppts to 0%, as higher input prices create some pressure but competition is keeping prices at bay.
Lastly, the balance of opinion on credit conditions showed a sharp improvement to the loosest since 2014Q2. A plunge in borrowing costs and the reopening of the economy helped here.
The Survey of Consumer Expectations showed inflation expectations holding steady at 2.2% over the next year, while the more forward-looking metrics were about unchanged as well. Labour market views showed a modest improvement, similar to the BOS, with lower odds losing a job and better odds of finding one. Wage expectations remain restrained at 2%. Anticipated income and spending growth picked up, but are at relatively low levels. And, consumers held fast on their outlook for interest rates...it's hard for them to fall much further.
Bottom Line: The Business Outlook Survey rebounded, but remains below pre-pandemic levels, as fully expected. There's still a long way to go in this recovery and the survey reflects that. Don't expect policy to be swayed by this report.