Canadian firms remain positive about the economic outlook but a growing number are reporting constraints on capacity, the Bank of Canada’s quarterly Business Outlook Survey, Autumn 2005 shows.

The survey shows that indicators continue to be stronger in Western Canada than in the rest of the country.

The survey showed that companies anticipate stronger sales growth next year, but that optimism was stronger in Western Canada than the rest of the country.

The central bank notes these regional differences have become more pronounce for most indicators since the last survey.

Labour is increasingly in short supply, especially in Western Canada.

“Pressures on capacity are similar to the high levels observed through most of 2004,” says the fall survey. “At the same time, labour shortages have risen significantly, mainly in Western Canada.”

A total of 36% of the 100 firms included in the survey said they would have “some difficulty” in meeting an unexpected surge in demand, up from 34% in the summer survey. And 10% said they would have “significant difficulty” meeting unexpected demand, up from 9% a quarter earlier.

Capacity restraints are particularly high in the primary, construction and transportation sectors, the survey says.

The pressure on capacity stems primarily from a shortage of labour, the bank said, with a whopping 51% of firms saying they face shortages, up sharply from 36% a quarter earlier.
“The proportion of firms reporting labour shortages that restrict their ability to meet demand has risen substantially,” the survey says.

As for inflation, about one quarter of the firms in the survey said they expect inflation to rise above the 3% ceiling on the bank’s target band, the survey shows.

And 60% of the firms expect annual inflation to be in the top end of the target range.

While inflation expectations in the fall survey are higher than in the summer survey, the bank warns, “this result was likely influenced by the surge in energy prices after hurricane Katrina.”

Investment intentions dropped slightly from a quarter earlier, but are still solid, with 39% of firms saying they intend to boost spending on machinery and equipment, mainly to upgrade or replace old equipment or expand production.

The survey was conducted between August 22 and September 14.