Canadian Firms Face Labour Shortages as Expectations of Inflation Rise: Bank of Canada Survey

A "closed" sign on a store window in Ottawa on March 23, 2020. (The Canadian Press/Adrian Wyld)

Even with the easing of COVID-19 restrictions, Canadian businesses are recovering at a slow pace due to labour shortages and supply chain disruptions, which is leading to higher expectations of inflation, a new Bank of Canada survey says.

The bank’s business outlook survey for the third quarter of 2021, published on Oct. 18, shows close to half of roughly 100 firms surveyed now anticipate inflation to remain above 3 percent for the next two years, citing factors of supply chain disruption, fiscal and monetary policy stimulus, and the recent increase in food and energy prices.

A separate Bank of Canada survey of consumers for the same quarter in 2021 also found that Canadians anticipate short-term inflation, with expectations that one year from now inflation will rise to 3.72 percent—a survey high that exceeded expectations at longer horizons for the first time. Longer-term inflation expectations of two years and five years were around 3 percent.

The surveys were published amid Canada’s 18-year-high inflation rate, which rose to 4.1 percent in August fuelled by global supply chain disruptions and labour shortages.

According to the Bank of Canada’s business outlook survey, while Canadian firms are optimistic about faster sales growth in the coming 12 months, they are also experiencing serious capacity constraints. In the third quarter of 2021, 65 percent of businesses said they would have “some difficulty” or “significant difficulty” meeting an unexpected surge in demand.

“An unusually large portion of firms said they would have difficulty meeting an unexpected increase in demand. This is true in all sectors and regions except the Prairies,” the central bank’s businesses survey said.

“These bottlenecks are often caused by shipping delays and the impacts of COVID‑19 abroad, particularly the Delta variant. Businesses reported that these disruptions have worsened and become more common since the second quarter.”

The bank also found that supply chain constraints are most severe in the manufacturing sector. Firms now also expect supply chain disruptions to last until at least the second half of 2022.

However, labour shortages present an even bigger challenge for businesses. Travel restrictions, government income support, and workers’ health concerns are adding to structural and cyclical factors that existed even before the pandemic.

Over a third of firms (36 percent) said they are experiencing labour shortages which are restricting their ability to meet customer demands, the business survey shows.

“Firms facing capacity challenges continue to adjust internal work processes and their supply chains through a variety of creative measures,” the survey said. These measures include working more closely with suppliers, adding overtime hours, investing in automation, and finding efficiencies.

Firms also reported somewhat higher “retirement and quit rates” among staff compared with pre-pandemic levels, suggesting that a change in workers’ preferences “may be affecting the availability of labour.”

This is consistent with more Canadians (roughly 19 percent) reporting more willingness to leave their jobs voluntarily, as shown in the consumer survey.

The labour shortage is also adding pressure on companies to increase wages, with roughly 57 percent of them saying they expect labour costs to be higher over the coming year compared to last year. Only 7 percent expected labour costs to be lower.

Employment intentions remain at a record high, and firms also showed more intentions to increase capital investments over the next year than in the previous year, particularly in machinery and equipment.

Together, the business and consumer surveys will inform the Bank of Canada’s next rate decision on Oct. 27.