Business sentiment across Canada increased to near record levels in the first quarter of 2021, as the economic outlook continues to improve for both domestic and foreign demand. However, along with the boost in optimism, an increasing number of businesses expect annual inflation to exceed the 2% target rate, which could cause selling prices to accelerate even faster.
According to the latest Bank of Canada Business Outlook Survey, business conditions across the country continue to show improvement, as an increasing number of companies become less worried about Covid-19-related uncertainties. The composite gauge of sentiment rose to 2.87 in the first quarter of the year, to the highest in three years and the third highest on records dating back to 2003. The latest reading is up by 1.3 from the previous quarter, and significantly higher from the decade-low of -6.9 recorded during the height of the pandemic a year ago.
Business managers have reported improved sales outlooks and increased investment intentions, but also indicated that capacity constraints were more subdued at historical averages. However, amid the broader positive sentiment, the survey of executives also revealed accelerating inflation expectations. More than half of the survey’s respondents expect inflation to exceed the Bank of Canada’s 2% target rate within the next two years. The respondents attributed their perceptions to strengthening demand and ongoing monetary and fiscal supports.
Moreover, as the Bank of Canada notes, the rising inflationary expectations appear to be widespread across all sectors of the economy. More than half of businesses anticipate positive price pressures will contribute to the growth of their input prices. In particular, commodity-related goods such as building materials, fuel, and agricultural products will the main source of increasing cost growth. As a result, a number of firms across various sectors revealed they plan to raise selling prices at a higher rate relative to the past 12 months.
The results of the survey give rise to expectations that the Bank of Canada will pull back some of its more aggressive monetary policies by the end of April. The central bank’s policy decision is slated for April 21, at which the bank may reduce the rate of its government bond purchases.
Information for this briefing was found via the Bank of Canada. Thee author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.