Sentiment among Canadian firms is at its lowest since the Covid-19 pandemic and inflation expectations remain elevated, Bank of Canada surveys show.
(Bloomberg) — Sentiment among Canadian firms is at its lowest since the Covid-19 pandemic and inflation expectations remain elevated, Bank of Canada surveys show.
The central bank’s business outlook indicator fell to 0.07 in the fourth quarter, from a revised 1.74 previously. About 70% of businesses see the economy heading into a recession, and more firms than usual expect their sales to decline. Higher interest rates and inflation have also limited the ability of consumers to spend, the bank said in a separate survey.
The data suggest the Bank of Canada won’t need to increase interest rates much further in order to bring demand and supply back into balance, and that last year’s aggressive hikes are already working to slow growth.
“The survey data very much suggests that the bank may be quite close to the end of its tightening cycle,” Toronto-Dominion Bank strategists Andrew Kelvin and Robert Both said in a report to investors. Nevertheless, “the bank can ill afford a premature pause in 2023.”
Most workers don’t expect their earnings to catch up with recent price pressures, and about half of households think they will be negatively affected by a potential recession. About half of consumers who expect a downturn think it will be moderate in severity and length, while 90% of businesses expect it to be mild.
Governor Tiff Macklem and his officials have slowed down the pace of rate hikes and signaled that future decisions will depend on economic data. The central bank has already raised borrowing costs by 4 percentage points since last March, bringing the benchmark overnight rate to 4.25%.
The surveys and December’s inflation report from Statistics Canada — due Tuesday morning — are the final major inputs into the central bank’s Jan. 25 policy decision. Traders in overnight swaps markets were putting the odds of a 25-basis-point hike at more than 80%.
The yield on benchmark two-year Canada bonds was at 3.586% as of 1:14 p.m. Ottawa time, down 8 basis points from Friday’s close and slightly below its trading level before the survey release.
The contrast between the deteriorating business outlook and a recent string of stronger-than-expected economic data complicates the bank’s policy response.
While the headline annual inflation rate eased in November, underlying price pressures trended higher. Early estimates suggest the economy is on track to expand at an annualized rate of 1.2% in the last quarter of 2022 — more than double the Bank of Canada’s forecast. Last month, the labor market blew past expectations and added more than 100,000 jobs, while the unemployment rate fell to near a record low of 5%.
Four out of Canada’s six biggest bank now expect another rate hike from Macklem, with Canadian Imperial Bank of Commerce and Royal Bank of Canada changing their forecast after the blowout jobs report.
(Updates with chart, economist reaction.)
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