Canadian business sentiment has plummeted to its lowest point since the Covid-19 recession, according to recent surveys conducted by the Bank of Canada. The bank’s business outlook indicator marked a seventh consecutive quarterly decline, falling to -3.5 in Q3 from -2.3 in Q2 on Monday. This downturn is largely due to slower past sales growth, weaker future sales indicators, and reduced plans for hiring and capital expenditure.
Firms are planning larger, more frequent price increases amidst an anticipated hiring slowdown. High inflation expectations persist among consumers who, expecting adverse effects from rate hikes in the next 12 months, are less likely to make major purchases and more inclined towards discretionary spending.
Despite these deteriorating economic conditions, consumers’ wage growth expectations have reached a peak. The less severe perception of labor shortages than last year is also contributing to this sentiment.
The Bank of Canada’s policymakers, led by Governor Tiff Macklem, kept interest rates steady at 5% in September despite underlying price pressures. However, businesses believe that achieving the 2% inflation target will take longer than three years due to the Bank of Canada’s tightening cycle.
Statistics Canada is set to release inflation data soon, following an annual inflation rate of 4% reported in August. One-third of firms disclosed decreased sales over the past year due to weakened demand, with many forecasting over three years for inflation’s return to the bank’s 2% target. Approximately one-third of companies are also preparing for a possible recession within the next year.
The Canadian survey of consumer expectations reveals a significant gap between perceived and actual inflation. The climbing cost of living is consumers’ main worry, and many expect the impact of higher interest rates to continue. The bank is prepared to hike if necessary to reach the two per cent inflation target.
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