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Worries of Canadian Businesses Continue to Escalate

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  • In April, The Conference Board of Canada’s Index of Business Confidence fell 3.1 points to 80.7 (2014=100), sitting at the lowest level since the third quarter of 2020. The survey was conducted between April 7 and April 20, 2022.
  • Survey respondents continue to be less optimistic about the Canadian economy. Seventy-one per cent of respondents said that they expect overall economic conditions in Canada to worsen or remain the same over the next six months. This is roughly seven percentage points higher than the previous survey in February 2022.
  • Sixty-seven per cent of survey respondents said that they expect prices in Canada to rise at an annual rate of 5 per cent or greater over the next six months. Meanwhile, 17 per cent believe that prices will increase at an annual rate of 8 per cent or greater.
  • Sixty-four per cent of businesses surveyed believe that their profitability will worsen or remain the same over the next six months, which is in line with the previous survey.
  • Only 18 per cent of respondents expect supply chain disruptions to improve over the coming six months. Forty per cent of respondents expect supply chain disruptions to worsen, and 42 per cent expect them to remain the same.
  • Roughly half of the survey respondents believe that the rising cost of capital goods or shortage of qualified staff are the main factors affecting their planned investment expenditures. Rising labour costs and government policies (mainly at the federal level) are also factors affecting businesses’ planned investments.

Key Insights:

  • Since the previous survey in February 2022, we have seen the Bank of Canada raise interest rates by 75 basis points. The expectation is for the Bank to continue raising rates to get inflation under control. Russia’s invasion of Ukraine has also placed further pressure on global supply chain disruptions and commodity prices. Given these events, another drop in the Index of Business Confidence was more than likely expected. It remains to be seen when business confidence will improve as this was the third consecutive quarter in which the index declined. The last time the Index of Business Confidence experienced three declines in a row was back in 2014–15, when the oil price plunged by roughly 57 per cent (from June 2014 to March 2015).
  • Another worrying sign for Canadian businesses relates to the cost of labour. Forty-six per cent of respondents believe that rising labour costs are adversely affecting their planned business investments. This is roughly 36 percentage points higher than our previous survey in February, and the highest number since the survey started in 1993. Besides, the longer high inflation persists, the more pressure businesses will face from workers to increase their wages, raising business’ labour costs even more.
  • Even though the pandemic’s peak seems to be behind us, some respondents have expressed concerns regarding the recent wave of COVID-19 in China. The main concern is that global supply chains will face additional disruptions with the recent lockdowns in China, which could further increase inflation. The recent widespread lockdowns in China have led to severe congestion at the country’s ports. According to a shipping analytics firm, Windward, the number of vessels waiting outside Chinese ports has nearly doubled from February to April. Even if congestion at Chinese ports eases, it will take time for international ports to deal with the influx of containers arriving from China.

Note: The Conference Board of Canada’s Index of Business Confidence summarizes Canadian business executives’ views on the state of the economy and is a reliable leading indicator of investment spending.

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Sasan Fouladirad

Sasan Fouladirad

Economist

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