–Firms’ Inflation Expectations Slowly Trending Down but Above 3% Over Next 2 Years
–Consumers’ Near-Term Inflation Outlook Little Changed Around 4%
–Businesses, Households Concerned about Economic Outlook Amid High Borrowing Costs
By Max Sato
Sentiment among companies in Canada picked up slightly in October-December for the first rise in eight quarters amid slowly easing labor shortages but high interest rates are clouding their sales prospects, prompting them to have modest investment intentions and weak hiring plans, the Bank of Canada’s quarterly Business Outlook Survey (BOS) released Monday showed.
“Firms increasingly see demand and competition as moderating their output price growth,” the bank said. “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.”
The business outlook indicator rose to minus 3.15 in the fourth quarter from minus 3.45 in the third quarter and followed minus 2.25 in the second quarter, minus 0.92 in the first three months of 2023 and plus 0.18 in the final quarter of 2022. Excluding the pandemic period, the third-quarter reading of minus 3.45 was the worst since minus 3.54 in the third quarter of 2009.
The BOS indicator has declined from its record high of 5.64 hit in the fourth quarter of 2021. The indicator plunged to minus 6.03 in April-June 2020 from minus 0.62 in the previous quarter during the first wave of the pandemic. The entire time series of the indicator is revised after every release.
“Concerns about labour shortages are receding; even so, wage growth is expected to ease only gradually,” the bank said. “Partly because of this slow easing, firms expect inflation to remain above the Bank of Canada’s 2% target for some time.”
The majority of firms think wage growth will be back to normal by 2025, it said.
Firms’ pricing behavior, another key factor closely monitored by the bank, is slowly returning to normal, the BoC said, but added that “some businesses continue to make larger and more frequent price increases than they did before the COVID‑19 pandemic.”
“Amid continued high interest rates, businesses’ top concerns have shifted to demand and uncertainty about economic conditions,” the bank said. “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.”
“Some firms also expressed concern about upcoming mortgage renewals further reducing people’s disposable income,” the bank said, noting that the Canadian Survey of Consumer Expectations for the fourth quarter showed that homeowners who are set to renew their mortgages plan to cut spending to lessen the impacts of higher payments.
Inflation Expectations Among Firms Remain High
Looking ahead, short-term inflation expectations are slowly trending downward but the bank noted that overall businesses still expect inflation to remain elevated over the next two years.
“Despite the declining trend in short-term inflation expectations over the past year, the share of businesses that believe inflation will not return to the Bank of Canada’s 2% target in the next four years has risen to about one-quarter of firms (from 18% in the previous survey),” the bank said. These businesses often cited high prices for energy, food and housing as the main obstacles to a quicker return to the inflation target.
In the latest survey, firms’ inflation expectations over the next two years continued to moderate to 3.17% in the October-December quarter from 3.29% in July-September from 3.53% in April-June but remains above the bank’s 2% target.
The share of firms expecting inflation to be above 3% over the next year edged up to 54% in the latest survey from 53% previously while that of firms foreseeing inflation to be between 2% and 3% was unchanged at 39%.
Ahead of their next policy rate announcement on Jan. 24, the bank’s policymakers will monitor more data including the release on Tuesday of December CPI data (consensus for the annual rate is 3.4%, up from 3.1% in November), and discuss whether the past credit tightening is sufficient to guide inflation to back to target after the latest jobs data showed wage pressers remain elevated.
The survey was conducted from Nov. 14 to Dec. 1 after the bank’s Oct. 25 meeting. The bank on Dec. 6 announced it decided to maintain its policy interest rate — the target for overnight lending rates — at a 22-year high of 5.0% for the third straight meeting, as expected, after the latest data showed the economy had been struggling to grow and the unemployment rate had ticked up under the weight of the bank’s earlier rate hikes.
Consumers’ Near-Term Inflation Outlook Remain Elevated
In its quarterly survey of consumer expectations for October-December, the Bank of Canada said near-term inflation expectations remain well above the bank’s target despite easing price pressures.
“Consumers perceive inflation to have decreased, and their expectations for price growth for some key goods such as food and gas have moderated,” the bank said. “But near-term inflation expectations have barely changed.”
“Persistently high expectations for inflation for services such as rent may be slowing progress in returning overall inflation expectations to where they were before the COVID‑19 pandemic,” it said. “Expectations for inflation in the long term have fallen further below the historical average and continue to be more varied than usual.”
Canadians are more pessimistic than last quarter about economic growth, and many remain uncertain about the economic outlook, the survey showed.
“This uncertainty is leading to cautiousness that is weighing on spending decisions,” the bank said. “Although workers perceive the labour market to be weaker, their expectations for wage growth remain elevated.”
Consumers’ inflation expectations over the next two years fell to 3.94% in the December quarter after edging up to 4.04% in the September quarter from 3.93% in the June quarter. Their outlook for the coming year is 4.91%, sliding further from 5.03% previously.
The consumer survey was conducted between Nov. 1 and Nov. 17. Follow-up interviews took place from Dec. 1 to Dec. 8.