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BoC: Business Sentiment Rises in 2021Q1, Before the Third Wave of the Pandemic

  • The Bank of Canada Business Outlook Survey (BOS) reported an improvement in business sentiment in the first quarter of 2021. The BOS indicator, a statistical summary of survey results, increased from 1.3 to 2.9 in 2021Q1. The resiliency of the economy to the pandemic and associated restrictions, as well as the continued rollout of vaccines, boosted business confidence. However, the survey did not include the impact of the third wave of the pandemic, as it was conducted from mid-February to early March, prior to the recent surge in caseloads.
  • Outside of high-contact services, demand is improving. Nearly two-thirds of firms said their sales had returned to or moved above pre-pandemic levels. In addition, half of businesses said renewed restrictions due to the second wave of the pandemic had a smaller or no impact on sales compared to the first wave as consumers and businesses better adapted to the health crisis. Businesses reported that low interest rates and a shift in consumer preferences toward housing goods and services supported their sales outlooks. Having said that, one-fifth of firms do not expect sales to return to pre-pandemic levels in the next 12 months. Most of these were in high-contact service industries.
  • The BOS indicated that overall capacity pressures are moderate. Businesses seeing strong demand most often reported labour supply constraints, specifically in skilled trades and information technology. On the other hand, firms in high-contact services continued to report significant excess capacity.
  • Firms are planning to increase investment and expand their workforce. Businesses that were reaching the capacity limits indicated that they are focused on implementing new technologies such as automation or digitalization. On the employment side, three-quarters of businesses said employment levels were not negatively affected by the pandemic or have fully recovered. A commonality among these firms were that their plans to hire were linked to the expected increase in sales.
  • On inflation, more than half of firms expected higher price pressures due to rising input prices. Firms also noted that elevated shipping and freight fees are contributing to price pressures. Businesses across most sectors expect to increase their selling prices, albeit from a low level, to rebuild margins and service consumer demand.

Key Implications

  • The first Business Outlook Survey of the year showed businesses growing more optimistic on the economic outlook as the arrival of vaccines suggest consumer demand will improve over the course of the year.
  • The survey, however, did not include the impacts of the third wave of the pandemic. Deteriorating health conditions and uncertainty on future restrictions could weigh on sentiment in the near-term. Businesses may hold off on kicking off investment plans until the virus is brought under control.
  • The race is now between vaccines and virus variants. Until vaccines gain the upper hand, the pandemic will continue to cast a shadow over the economy.
TD Bank Financial Grouphttp://www.td.com/economics/
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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