Supply chain worries weigh on businesses’ investment plans

  • In November, The Conference Board of Canada’s Index of Business Confidence fell 19 points to 85.6 (2014=100) and now sits at its lowest level since mid-2020. The survey was conducted between November 10 and November 24, 2021.
  • Half of the survey respondents said they expect prices in Canada to rise at an annual rate of 5 per cent or greater over the next six months. Despite the Bank of Canada stating that inflation is “transitory but not short-lived”, it seems businesses mostly believe the “not short-lived” part.
  • 54 per cent of the respondents reported that the shortage of qualified staff is adversely affecting their level of planned investment expenditures, the highest level on record dating back to 1993.
  • For this survey, we added a question on supply shortages. When asked if they thought supply chain disruptions would improve over the next six months, 41 per cent of firms said they expected them to worsen, while 34 per cent believed the disruptions would remain the same.
  • Overall, respondents were less optimistic about the Canadian economy than our previous survey conducted in August. About 40 per cent of respondents said they expect economic conditions in Canada to be better six months from now, while 30 per cent thought conditions would be worse. In August, the ratio of optimism to pessimism was 70 to 10.

Key insights:

  1. Over the past year, businesses were understandably telling us that they thought their investment prospects would improve in the six months ahead. However, the optimism is fading, and firms are shifting their focus from the economic recovery to concerns about the pandemic’s fallout.
  2. The survey’s results reinforce our view that weak business investment will drag Canada’s economic recovery over the next several months. Many issues are holding companies back from ramping up capital spending, with supply chain disruptions, inflationary pressures, and lack of access to enough qualified staff dwarfing other factors. Until conditions improve, many firms are likely to remain on the sidelines in terms of investment spending.
  3. Beyond the short term, the story does not get much rosier. Investment spending will remain a sore spot on the Canadian economy due, in part, to our competitive disadvantage compared to the United States—particularly when it comes to corporate taxation. Given the massive government spending used to fight the economic impacts of the pandemic, it is unlikely this disadvantage (at least in terms of taxation) will go away anytime soon, hurting the potential upside of capital spending for years to come.

Comments