EconoFACTS

January 11, 2021 | 11:38

BoC's BOS and Survey of Consumer Expectations (2020 Q4) — Bring on the Vaccine

Economist

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

The Bank of Canada's Q4 Business Outlook Survey showed a continued broad-based rebound in sentiment following Q2's record low. The survey was taken from mid-November to early December, ahead of the renewed surge in COVID cases. Indeed, timing matters here, as it's likely that if the Survey was taken a few weeks later (post-tightening provincial restrictions) the optimism would have been more tempered. Overall, the Business Outlook Indicator jumped 3.5 pts to 1.3, back into positive territory and the strongest since 2018Q4. Despite the improvement, the text included with the Survey highlighted that service-based industries continue to struggle.

Some details from the Q4 report:

Future sales growth climbed to 48% (from 39% in the prior quarter), as it's pretty hard to say that sales won't improve over the next 12 months (versus the prior 12) with the vaccine being rolled out. That's the highest print since late 2009 when the economy was emerging from the financial crisis. Perhaps more telling is that the indicators of future sales (i.e. order books, etc.) improved 23 ppts barely moving out of negative territory to just +1%. That figure highlights that sentiment is more subdued for firms in high-contact services. Not surprisingly, "Advancements in vaccine development also supported firms’ optimism, although most businesses anticipate that the positive impacts of a vaccine will not materialize until later in 2021."

Investment intentions jumped 24 ppts to 26%, amid vaccine-driven optimism about a return to normal, and somewhat less uncertainty. Firms less impacted by the pandemic are planning to increase spending, with many looking to expand and "boost productivity" through "automation and digitalization" amid an improving sales outlook. Here too though, services firms still hampered by pandemic restrictions plan on holding back and spending less. Similarly, employment intentions perked up to 43%, matching a more than two-year high. A firmer sales outlook has lifted hiring intentions, but ongoing restrictions on services has "one-quarter of firms expect(ing) the size of their workforce to remain below pre-pandemic levels for at least another year."

Capacity pressure rose to above long-term average levels in Q4, driven by pandemic-driven supply chain challenges. Firms reporting that they would have some or significant difficulty meeting an increase in demand—the key capacity metric in this report—rose to 57%, from 44% in Q3. That matches the highest reading since 2007. The BOS notes that the pressures are predominantly among goods producers, as they experience long wait times for materials. Not surprisingly, there's plenty of excess capacity in high-contact services sectors. Labour shortages increased in the quarter nearing the top of the decade-long range, but the intensity of the shortages remained subdued. Despite the elevated reading on capacity pressures, there's little doubt the Canadian economy remains below potential overall, though perhaps the output gap isn't quite as wide as thought.

Inflation expectations perked up along with everything else. More than three-quarter of firms (81%) expect inflation will be 1%-to-3% range (60% are in the 1%-to-2% bucket), with 7% expecting below 2% and 8% anticipating above 3%. The extremes are down from the prior quarter, with expectations pretty balanced overall. A net 24% of firms expect input prices to climb amid rising commodity prices and increased shipping costs. Output price expectations firmed 15 ppts to 15%, as "improved demand conditions" mean "more firms are now able to pass most of these higher input costs on to their customers."

Lastly, the balance of opinion on credit conditions held steady at the loosest since 2014. Persistently low borrowing costs are helping here.

The Survey of Consumer Expectations showed a broad improvement in sentiment as well, though expectations remain subdued overall. Inflation expectations moved up modestly over the next year, but pulled back a bit longer-term. Labour market views were mixed, with a modest improvement in wage growth and job market views little changed. Anticipated spending growth picked up (income was up ever so slightly), which shouldn't be a big surprise with a big savings cushion waiting to be unleashed once the economy fully re-opens.

Bottom Line: The Business Outlook Survey improved right across the board. Despite the upbeat headline figures, the underlying story is mixed with services sectors continuing to struggle amid ongoing restrictions. Still, with the vaccine being distributed the outlook is brighter than it was a quarter ago. Overall, while the improvement suggests there's little need for more stimulus from the BoC at next week's policy meeting, the Survey was taken before the recent wave of restrictions so the results might get a bit less weight than usual.

Table 1 - Bank of Canada — Business Outlook Survey

(balance of opinion : greater minus lesser : %)

Source: BMO Economics, Haver Analytics, Bank of Canada