The projections for next year are looking positive for Canadian businesses, according to a survey conducted by the Bank of Canada.

The spring 2011 Business Outlook Survey, a summary of interviews with the senior management of about 100 Canadian firms, shows that by and large the economic environment is expected to be favourable over the next 12 months.

Overview

The key insights gathered from the survey show that:

• Businesses remain positive about the economic outlook;
• The strength in commodity prices has raised expectations for costs and inflation;
• Firms continue to expect sales growth to increase over the next 12 months; and
• As economic recovery advances, more firms - particularly those in the Prairies - report operating near capacity, but labour shortages remain subdued.

Business activity

In general, firms reported an increase in sales growth over the past 12 months and expect sales to grow at an even greater rate over the next year. However, the balance of opinion fell from its winter survey level, as some firms in the services sector expect growth to be moderate following a strong rebound over the past 12 months.

Some firms believe that the high prices for energy and food will affect household spending and could subsequently dampen sales. A number of respondents also expressed concern about the impacts of the high Canadian dollar and strong foreign competition on their businesses over the medium to long term.

Regionally, businesses in the Prairies are the most optimistic about sales prospects over the next year, benefiting from a strong demand for commodities and related products.

Projections on investment remain positive from the winter survey, with firms predicting a rise in investment spending over the next 12 months. Many respondents that plan to increase investment expenditures say they are focused on either increasing output or enhancing productivity in order to improve competitiveness.

Similar to the winter survey, firms expect to see an increase in employment. Intentions to increase employment are present across all sectors and regions, but are most salient in the Prairies region, where businesses are looking to expand their workforce to meet demand.

Pressures on production capacity

More firms indicated that they would have difficulty meeting unforeseen increases in demand, with five per cent stating they would have significant difficulty and 38 per cent saying they would have some difficulty, a slight increase from the winter survey.

Capacity constraints are most prevalent in the Prairies region, where higher activity in the resource sector has resulted in a fully utilized workforce.

Overall, the number of firms reporting capacity constraints is relatively modest. But the percentage of firms claiming that labour shortages are restricting their ability to meet demand remains low across all regions and sectors, at 14 per cent.

Prices and inflation

The percentage of firms that expect the prices of inputs to increase more over the next year than they did last year is high at 53 per cent, up from the winter survey number of 42 per cent. These expectations are largely based on the current strength of commodity and related input prices.

Almost half (46 per cent) of respondents also expect their output prices to increase at a greater rate over the next 12 months, up from the 38 per cent in the winter survey. This is particularly resonant in the Prairies region and is consistent with stronger demand and more evident capacity constraints among firms in that area.

Businesses outside of the Prairies said they expect a slower rate of increase over the next year, stating they had already increased output prices over the past 12 months or citing strong competition as a factor in output price growth.

Expectations of total CPI inflation over the next two years rose from the winter survey, driven by increases in food and energy prices. Though eight in ten firms expect inflation to remain within the one to three per cent range, more firms (58 per cent) expect it to be in the upper half of that range.

Credit conditions

The report indicates that credit conditions seem to have eased over the past three months, with 21 per cent of firms responding that conditions are not as tight, a one per cent difference from the winter survey number of 22 per cent.

The most cited factors for the easing in credit conditions were:

• An improvement in the market's receptiveness to new issuance of debt or equity; and
• Lower borrowing costs.

The full results of both the spring and winter Business Outlook Surveys are available at the Bank of Canada website.

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