–High Cost of Living, Mortgage Renewal Concern Consumers, Some Think Worst May Be Over
By Max Sato
(MaceNews) – Sentiment among companies in Canada declined for the sixth straight quarter in April-June, deeper into negative territory, as continued credit tightening by many central banks is slowing global demand but many report domestic demand is up slightly on year due to improved supply chains and waning fears of a recession, the Bank of Canada’s quarterly Business Outlook Survey released Friday showed.
Firms’ expectations for short-term inflation continue to decline gradually but remain high, the survey results showed, indicating the bank’s tightening cycle that began in March 2022 may not be over yet. The bank’s policymakers will monitor more indicators including the July 9 release of May jobs data and consider whether further tightening is needed to guide inflation to target from the current rate of 3.4% in May in its next rate announcement on July 12.
While most businesses anticipate that, in the long term, inflation will be within the bank’s inflation-control target range, a greater number of firms than in the January-March survey think it will take five years or more for inflation to return close to 2%.
The survey was conducted from May 8 to May 25, before the bank’s latest policy decision on June 7, when it unexpectedly raised the policy interest rate by 25 basis points to 4.75% from 4.50% after taking a “conditional” pause for a second straight meeting in April.
Business Indicator Dips to Nearly 3-Year Low
The bank’s business indicator fell to a nearly three-year low of minus 2.15 in the second quarter from minus 1.07 in the first three months of 2023 and 0.08 in the final quarter of 2022. The negative figure in the first quarter was the first since the third quarter of 2020 (minus 2.57) and well below the record high of 5.92 hit in the fourth quarter of 2021. The entire time series of the indicator is revised after every release.
The indicator plunged to minus 6.32 in April-June 2020 from minus 0.78 in the previous quarter (the first negative figure in three quarters) during the first wave of the pandemic.
Inflation Expectations Among Firms Drift Lower but Still High
In the latest survey, firms’ inflation expectations over the next two years continued to moderate to 3.7% from 3.9% in the March quarter and 4.2% in December. In the bank’s monthly Business Leaders’ Plus survey, firms’ inflation outlook two years ahead eased to 2.8% in June after ticking up to 3.0% in May from 2.7% in April.
The share of firms expecting inflation to be above 3% over the next year fell to 64% in the latest survey from 79% previously while that of firms foreseeing inflation to be between 2% and 3% rose to 30% from 17%.
“Businesses most commonly attribute short-term inflationary pressures to high labour costs, robust government spending and a strong domestic economy,” the bank said.
“In contrast, 3 in 10 firms anticipate that inflation will soften to between 2% and 3% on average over the next two years,” it said. “These businesses attributed their expectations of weaker inflation to monetary policy actions that the bank has taken throughout the past 15 months.”
Overall, firms still expect inflation in the long term to be within the bank’s inflation-control target range, but the bank noted that several businesses — more than in recent surveys — think it will take five years or longer for inflation to return to the bank’s 2% target due to high government spending and strong demand either for housing or linked to Covid pent-up demand and extra savings.
“Although labour shortages remain common in some sectors, pressures on the labour market are easing due to decreased competition for workers and increased labour supply,” the bank said. “In this context, firms expect growth in their wages to moderate from high levels.”
The survey showed that businesses’ price-setting behaviour is gradually shifting closer to what it was before the pandemic. But the bank noted that some firms are still planning to make larger and more frequent price increases than usual in the coming year because they have not yet finished passing through the cost increases.
“Overall, firms are planning for modest increases in their capital expenditures due to weakened demand prospects as well as higher financing and construction costs,” the bank said. “Still, investment intentions among businesses tied to the natural resources sector remain healthy and are supported by strong global demand and favourable pricing conditions.”
Consumers’ Inflation Outlook Also Lower
In its quarterly survey of consumer expectations for April-June, the Bank of Canada said inflation expectations for one to two years ahead have come down again but remain well above their levels from before the pandemic. Consumers expect the growth of some goods prices to slow as supply chain pressures ease.
Consumers’ inflation expectations over the next two years fell to 3.93% from 4.27% in the March quarter and 5.14% in December. Their outlook for the coming year is 5.09%, down from 60.3% in the first quarter and 71.8% in the fourth quarter.
“Some people continue to think the high cost of housing and heightened government spending are important factors keeping inflation above target,” the bank said. “The increasing cost of living is the most pressing concern for consumers. Along with elevated interest rates, it continues to constrain most households’ spending.”
“Despite concerns about the cost of living and mortgage renewal, some households are starting to think the worst is behind them,” the bank said. “Although half of respondents still expect a recession in the coming year, consumers’ confidence about the future of the economy has improved as their inflation expectations have lowered.”
Most mortgage holders are confident they will be able to make these higher payments, though doing so will further constrain their discretionary spending, the bank said, adding, “This confidence may be linked to increasing income.”
Consumers also think that within the next 12 months interest rates will drop from where they were during the survey period. Coupled with strong immigration, which boosts housing demand, the expectation for lower interest rates is leading consumers to believe that prices in the housing market will increase over the next year, the bank said.
This survey was conducted between May 8 and May 15 and follow-up interviews took place from May 23 to May 31, all before the bank’s latest rate hike.