Firms reported that demand remains weak overall. But there are some signs of returning optimism. Namely, indicators of business conditions, sales outlooks and employment intentions have changed direction after many quarters of decline. In the wake of weak past sales growth, expectations for improved sales are supported by population growth, efforts to enter new markets or develop new products, and expectations that interest rates will decline over the next 12 months.
"Firms reported that business conditions improved slightly in the first quarter. The uptick in sentiment follows nearly two years of deterioration and is reported widely across nearly all regions, sectors, and firm sizes," as stated in the survey.
Businesses are moderating their investment plans in response to high borrowing costs, persistently weak demand, and easing capacity pressures. In this environment, fewer firms feel the need to expand. Instead, more businesses are focusing their investment on maintaining existing capacity.
"Firms’ concerns have generally continued their trends observed in recent quarters. Fewer businesses are reporting binding capacity constraints—namely labor shortages and supply chain challenges—while their main concerns continue to shift toward demand, uncertainty, and credit," according to survey results.
Indicators of demand remain soft, with interest rates negatively affecting businesses and sales growth expectations remaining subdued for the next 12 months.
"Fewer firms are planning for a recession in Canada over the next 12 months, as indicated in the survey," showing a slight improvement in business sentiment.
Firms' investment intentions have become weak due to factors such as continued uncertainty, high borrowing costs, and recent weakness in certain commodity prices.
"Interest rates continue to curb demand, with about three-quarters of firms stating that interest rates are negatively affecting their business," the survey found.
Labour shortages are declining, but wage growth remains high, although it is expected to slow as wages catch up with cost-of-living increases.
"Less than one-quarter of firms reported binding labor shortages—on balance, firms indicated that labor market tightness has lessened compared with 12 months ago," according to the survey results.
Firms' pricing behavior is normalizing, with expectations for smaller increases in input costs and selling prices over the next 12 months.
"Firms expect their input costs and selling prices to go up over the next 12 months by less than they went up over the past 12 months," the survey outlined.
Inflation expectations are on a steady decline, with short-term inflation expectations gradually decreasing.
"Short-term inflation expectations continued their gradual downward trend. Only 27% of firms in the Business Outlook Survey expect inflation to persist above 2% beyond three years," the survey noted.
Survey results report opinions expressed by the respondents and do not necessarily reflect the views of the Bank of Canada. The survey was conducted from February 5 to 23, 2024, by the Bank's regional offices.
The Business Leaders’ Pulse is a survey of Canadian business leaders, and the publication contains results from the January, February, and March 2024 surveys.