In a quarterly survey released on Monday by the Bank of Canada (BoC), Canadian businesses are grappling with a decline in order books, largely attributed to a slump in consumer spending caused by higher interest rates.
This is based on a report by Reuters.
The central bank revealed that despite rising concerns over wages, firms foresee a relief in inflation over the coming year.
Reuters cited Royce Mendes, Head of Macro Strategy at Desjardins Group, who said, “Overall, businesses and consumers are feeling the pain of higher interest rates and are responding accordingly. Consumers are curtailing spending and businesses, seeing falling sales, are tapping the brakes on hiring.”
The survey reported that 38 per cent of businesses anticipate a recession in the next year, reflecting an increase from the previous quarter.
Similarly, 61 per cent of consumers share concerns about an impending recession, a rise from the last survey.
Businesses, compared to a year earlier, experienced a downturn in order books, with more firms expecting wages to rise in the upcoming year.
However, a silver lining appears as many businesses still foresee an increase in sales volumes over the next 12 months.
The business outlook indicator, a measure of economic sentiment, showed a slight improvement in the last quarter of 2023, rising from -3.45 to -3.15.
This shift was attributed to easing expectations for input and output prices.
39 per cent of businesses reported a decline in sales volumes over the past year, attributing it to various factors such as slowing growth, the impact of higher interest rates, and inflation.
The Bank of Canada raised its key policy rate to 5 per cent, a 22-year high, last year, and has maintained it since July.
Despite the current inflation rate of 3.1 per cent, down from the 2022 peak, it has remained above the BoC’s 2 per cent target since March 2021.
According to the survey, “Firms’ pricing behaviour is slowly returning to normal,” indicating a potential stabilisation in the economic landscape.
However, wage growth is expected to be higher than average in the next 12 months, often tied to cost-of-living adjustments.
Looking ahead, 54 per cent of businesses foresee inflation running higher than 3 per cent over the next two years, while 42 per cent expect it to remain below that threshold.
Interestingly, 27 per cent predict it will take longer than four years for inflation to return to the BoC’s 2 per cent target.
Governor Tiff Macklem, in his last public appearance of 2023, noted that short-term inflation expectations are gradually trending downward, but the persistence is expected due to wage growth and the prices of commodities, food, and housing.
The Bank of Canada is set to make its next interest rate announcement on January 24, with expectations of maintaining the key policy rate.
Money markets and economists, however, anticipate rate cuts in the first half of 2024.
The dual survey approach by the central bank also revealed that consumers do not anticipate further interest rate increases in the next year.
(With inputs from Reuters)
