–Firms’ Inflation Expectations Over Next 2 Years Ease to 3.0% from 3.2%
–Consumers’ Near-Term Inflation Outlook Remains High, Just Below 5% amid Elevated Food, Energy Costs
By Max Sato
(MaceNews) – Sentiment among companies in Canada continued improving in January-March after marking the first rise in eight quarters in October-December but demand remains weak, leading price pressures and labour conditions to ease, which prompted fewer firms to plan unusually large or frequent price increases over the next 12 months, the Bank of Canada’s quarterly Business Outlook Survey (BOS) released Monday showed.
“Firms reported that demand remains weak overall,” the bank said. “But there are some signs of returning optimism.” Businesses are moderating their investment plans in response to high borrowing costs, persistently weak demand and easing capacity pressures, it said.
The business outlook indicator rose to minus 2.42 in the first quarter of 2024 from minus 3.09 in the fourth quarter and followed minus 3.46 in the third quarter, minus 2.26 in the second quarter, minus 0.98 in the first quarter of 2023 and plus 0.11 in the final quarter of 2022. Excluding the pandemic period, the third-quarter 2023 reading of minus 3.46 was the worst since minus 5.05 in the second quarter of 2009.
The BOS indicator has declined from its record high of 5.63 hit in the fourth quarter of 2021. The indicator plunged to minus 6.02 in April-June 2020 from minus 0.61 in the previous quarter during the first wave of the pandemic. The entire time series of the indicator is revised after every release.
“Firms are finding it easier to fill job vacancies,” the bank said “Wage growth remains high, although most businesses expect it to slow as wages catch up with cost-of-living increases.”
“Businesses’ pricing behaviour is continuing to normalize,” it said. “But the slow moderation in wage growth and the gradual pass-through of high costs are keeping output price growth elevated.”
Among businesses anticipating that sales growth will improve in the next year, around half pointed to their expectations that interest rates will decline, the bank said, pointing to housing and other sectors that are sensitive to interest rates. Several firms also noted robust population growth, backed by the current fast pace of immigration, continuing to support their sales going forward.
Inflation Expectations Easing But Still Above 2% Target
Short-term inflation expectations continued their gradual downward trend, the bank said. Firms believe that the BoC’s past rate hikes are relieving upward pressure on inflation from demand and from capacity constraints while cost increases related to housing, food and wages are slowing the decline in inflation expectations.
“Only 27% of firms in the Business Outlook Survey expect inflation to persist above 2% beyond three years, down from 37% last quarter,” the bank said.
In the latest survey, firms’ inflation expectations over the next two years continued to moderate, but only gradually, to 3.0% in the January-March quarter from 3.2% in the October-December quarter, 3.3% in July-September and 3.5% in April-June 2023. It remains above the bank’s 2% target.
The share of firms expecting inflation to be above 3% over the next two years fell to 40% in the first quarter survey after edging up to 54% in the previous poll from 53% in the third quarter while that of firms foreseeing inflation to be between 2% and 3% rose sharply to 54% after being unchanged at 39% in the fourth quarter survey.
Ahead of their next policy rate announcement on April 10, the bank’s policymakers will monitor more data including the release on Friday of March employment data and discuss for how long the bank should maintain the restrictive level of interest rates in order to guide inflation back to target.
The jobs data is expected to indicate cooling but resilient labor market conditions, with the jobless rate seen ticking up to 5.9% from 5.8%. CPI data has shown consumer inflation eased slightly to 2.8% in February and 2.9% in January, matching the recent low hit in June 2023. By contrast, the GDP posted a robust 0.6% rise on the month in January and the advance estimate by Statistics Canada is a solid 0.4% gain, indicating the economy may grow at a faster pace than the annualized 0.5% projected by the bank in January.
The survey was conducted from Feb. 5 to Feb. 23 before the bank’s March 6 meeting at which it decided to maintain its policy interest rate — the target for overnight lending rates — at 5.0% for the fifth straight meeting, as expected, as officials continued looking for clearer signs that inflation is headed down toward the bank’s 2% target before considering a rate cut.
Consumers’ Near-Term Inflation Outlook Remains Elevated
In its quarterly survey of consumer expectations for January-March, the Bank of Canada said near-term inflation expectations are little changed and remain well above the bank’s target.
“Consumers believe inflation has slowed, but their expectations for inflation in the near term have barely changed,” the bank said. “Consumers link their perceptions of slowing inflation with their own experiences of price changes for frequently purchased items, such as food and gas.”
”Expectations for long-term inflation have increased, though they remain below their historical average,” it said. “Relative to last quarter, consumers now think that factors contributing to high inflation — particularly high government spending and elevated home prices and rent costs — will take longer to resolve.”
“Canadians continue to feel the negative impacts of high inflation and high interest rates on their budgets, and nearly two-thirds are cutting or postponing spending in response,” the bank said. Although weak, consumer sentiment improved in the first quarter, with people expecting lower interest rates. As a result, consumers are less pessimistic about the future of the economy and their financial situation, and fewer think they will need to further cut or postpone spending, the bank concluded.
Consumers’ inflation expectations over the next two years fell to 3.76% in the March quarter from 3.94% in the December quarter, 4.04% in the September quarter and 3.93% in the June quarter. Their outlook for the coming year is 4.92%, little changed from 4.91% in the fourth quarter but down from 5.03% in the third quarter.
The consumer survey was conducted between Jan. 25 and Feb. 14. Follow-up interviews took place from Feb. 19 to Feb. 27.