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Business Outlook in Canada Drops to Lowest Since Covid Shock

2023-10-16 23:47
Canadian business sentiment fell to its weakest level since the Covid recession of 2020, but inflation expectations of
Business Outlook in Canada Drops to Lowest Since Covid Shock

Canadian business sentiment fell to its weakest level since the Covid recession of 2020, but inflation expectations of both firms and consumers remain high, Bank of Canada surveys show.

In the first quarterly survey since the central bank held interest rates steady at 5% in early September, businesses reported economic activity has slowed across a broad range of indicators. Still, firms are planning to make larger and more frequent price increases than they did before the pandemic, even as they expect to slow hiring.

Consumers, on the other hand, still see the labor market as healthy despite a worsening economic outlook, and their expectations for wage growth are now at a survey high. The gap between their perceptions of inflation and actual inflation is also “unusually wide,” the bank said on Monday. Statistics Canada reports inflation data on Tuesday.

The bank’s business outlook indicator fell to minus 3.5 in the third quarter, from minus 2.3 in the previous quarter. That’s the seventh consecutive quarterly decline, and one of the lowest levels since the survey began, except during a brief period early in the Covid-19 pandemic.

The continued drop reflects slower past sales growth, weaker indicators of future sales, reduced plans for hiring and capital expenditures, and an increasingly widespread view that labor shortages are less intense than a year ago.

The data suggest that while firms expect demand to slow as consumers cut back on spending in response to the Bank of Canada’s tightening cycle, their inflation expectations are slower to adjust to the weakening outlook. That’s a challenge for policymakers who are betting the cooling economy will translate into a slower rate of price gains in the coming months.

In the bank’s business survey, more businesses think higher rates will constrain their sales and investment plans in the next 12 months, and many firms expect that getting inflation to the 2% target will take longer than three years.

Another survey showed consumers’ perception of current inflation remain elevated, and persistently high expectations for inflation over the next 12 months. Many also think increases in rates are raising the cost of living and keeping inflation high.

Consumers who expect more adverse effects ahead from rate hikes are less likely to plan major purchases, the survey data show. They said they’re more likely to spend on discretionary items, like vacations and concerts, than buy items usually financed with loans, such as cars and appliances.

Policymakers led by Governor Tiff Macklem held interest rates steady at 5% in September, but sticky underlying price pressures led the bank to keep the door open for further tightening.

The Bank of Canada next sets rates on Oct. 25.

(Updates with date of next inflation report in third paragraph. An earlier version corrected the headline and numbers in fourth paragraph)

Author: Erik Hertzberg and Randy Thanthong-Knight