Canadian business sentiment improves. Will rate cuts follow?

Survey shows consumers remain cautious

Canadian business sentiment improves. Will rate cuts follow?

Canadian businesses are becoming less pessimistic about the economy, Bloomberg reported, citing data from a new Bank of Canada survey.

Fewer companies now anticipate a recession, potentially alleviating pressure on policymakers weighing the timing of interest rate cuts.

While higher interest rates continue to dampen economic activity and sales outlooks remain “subdued,” a growing number of large Canadian firms show less concern about a sharp economic downturn. Additionally, easing inflation expectations among business leaders suggests they are becoming less likely to raise prices, and wage pressure may also decline.

A lingering challenge

However, a separate survey highlights that Canadian consumers still anticipate elevated inflation. They believe inflation will remain above the Bank of Canada’s 2% target for the next five years.

“Consumers are still signalling that they expect a protracted period of inflation to be riding above the Bank of Canada’s 2% inflation target,” said Derek Holt, head of capital markets economics at Bank of Nova Scotia. “That’s a bit of a disturbing sign.”

The central bank’s business outlook indicator improved in the first quarter, suggesting a less pessimistic view among business leaders. Firms still report weakened demand, and around 27% expect a recession (down from 37% previously).

“These surveys are encouraging for the bank, as inflation expectations are improving (even if slowly), and it looks as though the economy isn’t weakening any further,” Benjamin Reitzes, rates and macro strategist at Bank of Montreal, told Bloomberg. “There’s not enough here to push the bank to cut any earlier, but June is on the table as long as there’s continued progress in the next couple of CPI reports.”

Uncertainty remains a top concern for businesses, cited by 56% of firms, up from 52% previously.  Key drivers of this uncertainty include interest rates, input costs, and general domestic economic growth.  Worries about cost pressures and the outlook for sales demand also continues to rise.

The Bank of Canada’s survey reveals a sharp decline in investment intentions. Only 33% of firms expect to increase spending on machinery and equipment over the next year (down from 41% previously).  In addition to uncertainty, factors limiting investment plans include soft demand, high borrowing costs, and “fewer binding capacity constraints.”

Labor market and price pressures

Though inflation expectations among large Canadian businesses remain a concern, the survey notes they have continued to ease.  Currently, 27% of firms expect yearly price pressures to exceed 2% beyond three years, a decrease from the 37% reported in the previous survey conducted in late 2023.

The labor market is showing signs of loosening, with businesses expecting slower wage growth of 4.1%  – still higher than historical averages but less than the previous 12 months.  Fewer firms (22%) report labor shortages restricting their ability to meet demand, and a larger percentage (43%, up from 37% previously) expect their workforce to expand. 

“Normalization of wage setting remains a gradual process,” the BoC said.

The survey also indicates that fewer companies are planning to pass on price increases to consumers at a higher rate or with more frequency than normal.

Read next: Homebuyers may wait on sidelines for further rate drops, says economist

In the survey of consumer expectations, near-term inflation expectations remained largely unchanged from the previous quarter and well above the Bank of Canada’s 2% target.  Progress made in long-term inflation expectations has reversed.

Despite elevated mortgage costs, high home prices, limited housing availability, and challenges for renters in saving for a down payment, homebuying intentions have increased compared to last year.  The share of survey respondents planning to buy or considering buying a home increased to 15% (up from 13% in 2023), with a notable increase among renters (18%) looking to purchase within the next 12 months.

Central bank policy outlook

During their March 6 rate decision, members of the Bank of Canada’s governing council stated that it was “still too early” to consider lowering borrowing costs; they ultimately held the policy rate steady at 5% for a fifth consecutive meeting.  

Economists surveyed by Bloomberg anticipate that the Bank of Canada will begin lowering borrowing costs in June. The central bank’s next meeting is scheduled for April 10.

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