Business Survey Sees Dovish Labor Developments But No Further Progress In Prices

Significant moderation on labor-related aspects:

• Wage growth expectations decline “significantly”, with labour costs seen increasing 3.4% over the next twelve months vs 4.1% in both Q1 and Q4. It’s the lowest since 1Q21 and close to the historical average of 3.2%.
• The share of firms reporting labour shortages as limiting ability to meet demand fell from 22% to 15%, its lowest since 2Q20 and below the 29% average since 2017.

Price expectations see broad stalling in what had been good progress:

• The share expecting larger-than-normal price increases over the next twelve months increased from 17% to 21% in Q2 (vs the 27% average response to the same question in 2023).
• BoC commentary paints this in a positive light; it’s “well below” last year’s average and “considerably lower” than the 34% realized over the past year. However, the BoC make it very hard to know how this compares historically. Last quarter’s survey had a different question which showed 13% expecting output prices to increase significantly vs a pre-pandemic average of 11%.
• The increase in the share expecting larger than usual increases was at least partly offset by “more firms expect[ing] to keep prices flat”, whilst the share expecting more-frequent-than-normal price increases only marginally increased from 10% to 11% (averaged 15% in 2023).
• Inflation expectations generally flat over the quarter, with the 2Y unchanged at 3.0%. Monthly readings from the Business Leaders’ Pulse paint a similar picture.
• Fewer firms expect inflation of 2-3% over the next two years (from 54% to 48%). That more than offsets the 1pp increase for the share expecting inflation of >3% (from 40% to 41%) but a large increase in the no response share muddies the takeaway here.

Weak investment outlook:

• Investment intentions saw a tepid lift with a net 11% in Q2 expecting to increase investment spending on machinery & equipment over the next year after the 0% in Q1 was the lowest since 2Q20. It’s still below the 16% averaged since 2017.

Source: Bank of Canada