Business sentiment in Canada continues to worsen with companies expecting sales growth to slow over the coming year and inflation to remain elevated until at least 2025, according to the Bank of Canada’s quarterly business survey. At the same time, companies are reporting improvements in labour shortages and other supply constraints, while many expect wages to keep rising quickly.
The Business Outlook Survey and its companion Survey of Consumer Expectations, show Canadians remain nervous about the economy, despite stronger-than-expected growth at the start of 2023. This should reinforce the Bank of Canada’s decision to pause further interest-rate hikes, and sets the central bank up to keep its benchmark rate at 4.5% at the next monetary policy decision meeting on April 12.
Around half of the respondents to the business survey expect a mild recession this year, as higher interest rates curb consumer spending. Almost 60% of the respondents to the consumer survey expect a “small” or “significant” economic decline over the next 12 months. This aligns with the central bank’s forecast of near-zero growth over the first three quarters of 2023.
The bank is actively trying to engineer an economic slowdown to bring high inflation back under control. So far, however, the Canadian economy has proven surprisingly resilient in the face of eight rate hikes since March, 2022.
Statistics Canada reported that GDP grew 0.5% in January compared with the previous month, and a preliminary estimate showed a further 0.3% growth in February. This was more than the central bank or Bay Street analysts were expecting.
The surveys were conducted in late January and February, which means they don’t capture any knock-on effects from the recent convulsion in the U.S. banking sector. However, follow-up interviews conducted by the central bank found that business conditions have not changed much as a result of the banking stress.
Canadian businesses and consumers continue to expect inflation to remain worryingly high, although these expectations have declined over the past several quarters alongside the actual fall in Consumer Price Index inflation. Annual CPI inflation was 5.2% in February, down from a peak of 8.1% last June.
The average respondent to the business survey expects inflation to be 3.9% in two years’ time. That’s nearly twice the Bank of Canada’s 2% target.
Consumers, meanwhile, think that inflation will still be running at 4.27% in two years. Most respondents blamed supply chain disruptions for high inflation, the Bank of Canada said, although many also pointed to high government spending. The central bank cares about inflation expectations because beliefs about future prices can affect company price-setting decisions and employee wage demands in a self-fulfilling manner.
While many companies were downbeat about their future sales growth, business conditions have improved in several key areas. Crucially, labour shortages have become less intense and companies are less worried about meeting an unexpected surge in demand.
“Firms indicated that it has become easier to find the workers they need. They attribute this to less competition for labour and an improved labour supply,” the Bank of Canada said, pointing to increased immigration. “For the first time in several quarters, businesses no longer expect labour costs to put upward pressure on their output price growth,” the bank added.
Even with less competition for workers, businesses still expect to raise wages quickly this year, by an average of 4.7%. That’s down from a peak of 5.8% in the second-quarter 2022 survey, but well above the prepandemic average of around 3%.
Consumers remain upbeat about their job prospects, although they don’t think that their wages will keep up with inflation. They also reported feeling worse about their finances compared with previous periods of rising interest rates.
Canadians are being squeezed by a combination of rising prices and higher borrowing and debt-service costs. That’s leading some consumers to dial back spending plans.
“About one-third of consumers expect to travel less often, eat out less often and enjoy fewer paid entertainment or social activities in the next 12 months than they did in the previous 12 months. This is largely because of the high prices of these services and other essential purchases,” the bank said.