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Seventh Consecutive Fall in the Index of Business Confidence

Canadian Economics

By: Jake Lenarduzzi

  • In May, The Conference Board of Canada’s Index of Business Confidence fell 1.3 points to 74.4 (2014 = 100), the lowest level since the second quarter of 2020. The survey was conducted between April 26 and May 10, 2023.
  • Canadian executives continue to worry about overall economic conditions, though there are signs of improvement. 38.0 per cent of survey respondents expect the general direction of the Canadian economy to worsen, which is lower than the 41.5 per cent in the survey from February. Similarly, 47.8 per cent of respondents believe economic conditions will remain the same, up from last quarter’s 39.3 per cent.
  • Only 27.7 per cent of survey respondents said that they expect prices in Canada to rise at an annual rate of five per cent or higher over the next six months—a considerable improvement from the 43.0 per cent last quarter.
  • When asked about firms’ operational capacities, 62.8 per cent of respondents indicated that they are operating either slightly below or substantially below capacity. Only 6.4 per cent of respondents indicated that they are currently operating above capacity, with the remaining 30.8 per cent at (or close to) capacity.
  • Around 73 per cent of respondents believe their firm’s financial position will worsen or remain the same over the next six months, which is in line with the previous survey. Meanwhile, 26.6 per cent of respondents believe their firm’s financial position will improve.
  • When asked if it is currently the right time to undertake expenditures to expand their plant or add to their stock of machinery and equipment, 22.3 per cent said it is indeed a good time compared to 21.4 per cent in February. The remaining 77.7 per cent said they are either unsure or consider it a bad time.
  • Just 10.6 per cent of respondents believe that the current return on investment (ROI) is better than six months ago. 57.5 per cent believe the current ROI is as expected, while 31.9 per cent believe it is worse.

Key Insights

The Index of Business Confidence falls for the seventh straight quarter and stands alone as the worst downward spell on record. During the 2007–08 financial crisis, the index declined for six-consecutive quarters before reversing course in the first quarter of 2009. This time, the index has been trending downward since the third quarter of 2021. Although future optimism surrounding Canadian economic conditions has improved in terms of inflationary pressures and supply chain constraints, challenges such as rising costs of capital and labour, high interest rates, and weak market demand continue to adversely affect planned investment.

Rising labour costs leapfrog high interest rates as the leading worry for Canadian business executives. In our latest survey, 57.5 per cent of respondents believe rising labour costs are adversely affecting their level of planned expenditures over the coming six months, making it the number one concern among Canadian businesses. As of April, the average hourly wage rate is up 5.2 per cent annually. Also, on a year-over-year basis, firms within the goods sector saw a 6.3 per cent average hourly wage increase compared to 5.0 per cent in the services in April. With labour markets currently very tight, it is not surprising to see respondents indicate labour costs as a major worry, especially with the current trajectory of wages.

Capital expenditures are unlikely to see drastic changes in the months ahead. When asked about expected changes to their firm’s level of capital investment over the next six months, 75.5 per cent of respondents believe their expenditures will either remain the same or go up or down between one and nine per cent. This is 7.9 percentage points higher than the previous survey, which indicates that expenditures seem to be in a stable place. The Bank of Canada recently indicated that interest rates will not decrease until inflation nears its two per cent target. It may take some time for this to happen, but capital expenditures should start to lean more favourably once interest rates start to drop.

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