Canadian businesses have taken a pessimistic turn, with the outlook turning negative for the first time since 2020, according to surveys by the central bank. The Bank of Canada’s business outlook indicator fell to -1.1 in Q1 2023, from 0.1 in the previous quarter. Firms now expect slower sales growth for the fifth consecutive survey. Higher interest rates, inflation, and concern about an impending recession were cited as the main reasons behind the slower growth. The data suggests that the Bank of Canada’s aggressive rate increases over the past year have contributed to bringing down inflation expectations and are beginning to cool the domestic economy.
The survey also found that consumer expectations for inflation have eased but remain high. Consumers attribute high inflation to government spending, which has put pressure on the central bank’s ability to bring down inflation. Finance Minister Chrystia Freeland’s recent budget has increased Canada’s deficit with $43bn in new costs over six years. Consumers expect to spend less on travel, restaurant meals, and other social activities in the coming months, as inflation and rising interest rates put pressure on household budgets.
Despite the economic challenges, firms are gradually shifting closer to normal price-setting practices. Firms no longer expect labor costs to put upward pressure on output price growth. More than half of businesses plan to increase their workforce size over the next 12 months, though some are less likely to add staff or increase investment spending. A labor shortage intensity indicator turned negative for the first time in over two years, thanks in part to immigration.
James Orlando, an economist at Toronto-Dominion Bank, believes that the central bank should remain on hold for now. While economic growth, employment, and consumer spending have surged recently, he believes that if consumers and businesses adjust their behaviour in preparation for a slowdown, it could become a self-fulfilling prophecy. This implies that the string of positive surprises may not last much longer. Despite uncertainties surrounding the economy and labor market, consumers anticipate some relief in the housing market as interest rates may fall earlier than previously expected.
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