High interest rates are bringing down inflation expectations and slowing the pace that businesses are raising prices, while also creating considerable financial hardship for households, according to a pair of Bank of Canada surveys published on January 15. The central bank’s Business Outlook Survey for the fourth quarter of 2023 found Canadian companies are experiencing slowdowns in sales and increased competition. As a result, fewer businesses are planning larger-than-normal price increases in the coming year.

A separate survey of consumers found that Canadians are growing more pessimistic about the economy and pulling back on spending.

Taken together, the quarterly surveys reinforce the view that tight monetary policy is acting as a brake on the economy and reducing inflationary pressures. That supports market expectations that the central bank will hold interest rates steady at its next rate announcement on Jan. 24, and that it will begin lowering rates in the coming quarters.

The survey of about 100 companies, conducted in the second half of November, shows a weakening business environment. Nearly 40% of the survey respondents saw outright declines in sales over the past year. And indicators of future sales – including order books, advance bookings and sales inquiries – remained subdued.

The dour outlook for demand is feeding into weaker investment intentions and hiring plans. “Most firms do not feel the need to add new staff and are experiencing less-intense labour shortages than 12 months ago,” the Bank of Canada said.

Companies still expect to raise wages faster than normal over the next year as a result of cost-of-living adjustments. However, three-quarters of the survey respondents expect wage growth will be back to pre-COVID-19 norms by 2025.

Overall, business expectations of future inflation continued to ease in the fourth quarter, albeit very slightly. About one-quarter of the companies surveyed said inflation won’t return to the Bank of Canada’s 2% target in the next four years. The bank is watching inflation expectations closely, as beliefs about future inflation feed into today’s price-setting decisions and wage negotiations.

“The downbeat tone around business activity and consumer spending fits with the notion that the Bank of Canada has done enough to reduce demand,” Robert Both, senior macro strategist at Toronto-Dominion Bank, wrote in a note to clients. “But whether it has enough conviction that we remain on a sustained path to 2% despite elevated near-term inflation/wage expectations is far less certain.”

The consumer survey and accompanying interviews, conducted from the beginning of November through the first week of December, mirrored the gloomy sentiment found in the business survey. “Consumers continued to report feeling the negative impacts of high inflation and high interest rates, and more than last quarter are cutting their spending in response. Further spending adjustments are expected, with many mortgages coming up for renewal in the near term,” the Bank of Canada said.

Survey respondents reported feeling worse about their personal finances and more wary about the job market. People saw a higher likelihood of losing their jobs and a lower chance of switching jobs voluntarily.

On the question of inflation expectations, the survey results were mixed. Consumer beliefs about near-term inflation have barely budged in recent quarters, with people consistently expecting inflation to be around 5% in a year’s time. However, expectations for inflation five years out have now fallen below prepandemic levels.

Consumers increasingly expect inflation to moderate for key goods such as food and gas. But they think service prices, especially rents, will continue to rise quickly, and that “may be slowing progress in returning overall inflation expectations to where they were before the COVID‑19 pandemic,” the bank said.

“Over all, businesses and consumers are feeling the pain of higher interest rates and are responding accordingly,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients about the surveys. “With the Bank of Canada’s medicine now clearly working as intended, central bankers are likely to sound more dovish later this month when they hold rates steady for a fourth consecutive time.”

Source: Globe and Mail
Source: Financial Post

Business Outlook Survey—Fourth Quarter of 2023

Results from the Business Outlook Survey and the Business Leaders’ Pulse show that softer demand and renewed competitive pressures are slowly pushing down growth in output prices. Concerns about labour shortages are receding; even so, wage growth is expected to ease only gradually. Partly because of this slow easing, firms expect inflation to remain above the Bank of Canada’s 2% target for some time.

Overview

  • Firms’ pricing behaviour is slowly returning to normal; however, some businesses continue to make larger and more frequent price increases than they did before the COVID‑19 pandemic. Firms increasingly see demand and competition as moderating their output price growth. Nonetheless, businesses reported that downward pressure on the growth of their input and output prices has eased somewhat, leading to a less negative Business Outlook Survey indicator.
  • Firms reported less favourable business conditions in the fourth quarter. Many saw declines in sales volumes. Indicators of future sales, such as order books and sales inquiries, have deteriorated compared with a year ago. But, on balance, firms expect sales to stabilize over the next 12 months.
  • Amid continued high interest rates, businesses’ top concerns have shifted to demand and uncertainty about economic conditions. High interest rates have negatively impacted a majority of firms, and these firms have relatively muted sales outlooks, modest investment intentions and weak hiring plans.
  • Softer demand also means labour markets are easing. Most firms do not feel the need to add new staff and are experiencing less-intense labour shortages than 12 months ago. Still, wage growth on average is expected to be higher than normal over the next 12 months, often related to cost-of-living adjustments. Wage growth expectations are gradually declining, however, as fewer businesses adjust wages for past cost-of-living increases and as demand for labour eases. The majority of firms think wage growth will be back to normal by 2025.
  • Inflation expectations have been slowly trending down. But about one-quarter of firms think it will take longer than four years for inflation to return to 2%. They noted in particular the impacts of increases in wages, food prices and housing costs.

Read the full report at the Bank of Canada’s website. 

Source: Bank of Canada