The majority of businesses and consumers expect Canada to enter a recession within the next year, while most continue to believe that inflation will remain high for several years – a difficult mix for the Bank of Canada which sets the stage for another significant interest rate hike the next time around. the week.
The Bank of Canada released a pair of quarterly surveys on Monday showing a sharp decline in business and consumer confidence in the economy as interest rates rise, hitting the housing market and reducing the purchasing power of consumers.
Businesses and consumers said they expect inflation to remain high in the coming years. There are, however, some positive signs that the conditions forcing price increases are easing for businesses, suggesting that Canada has so far avoided the worst-case scenario of a wage-price spiral.
The business outlook indicator, which reflects business sentiment on future sales, investment and hiring, saw its biggest quarterly decline since the early months of the COVID-19 pandemic. Businesses related to the housing sector were particularly sluggish. The survey of around 100 companies was conducted from mid-August to mid-September.
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The consumer survey, conducted in mid-August, found that most respondents don’t believe their wages will keep pace with inflation, and many have started cutting spending. Almost 80% said the probability of a recession in Canada in the next year is at least 50%.
The crucial measure for the Bank of Canada in both surveys is inflation expectations. What consumers and businesses think about future price increases can affect the path of inflation, as employees negotiate higher wages and businesses raise prices to protect their profit margins. The central bank fears that people will expect permanently high inflation and that price hikes will be self-reinforcing.
Surveys show that inflation expectations remain high for both businesses and consumers. But there were some glimmers of hope, which could influence the Bank of Canada’s choice to raise interest rates by 0.5 percentage point or 0.75 percentage point in its next decision on the 26th. october.
The average business survey respondent expects inflation to be 4.26% in two years. This is down slightly from July, but still well above the Bank of Canada’s 2% target. However, many companies said they expect key inflationary pressures to ease.
“For the first time in the past five quarters, businesses reported that their supply chains had improved compared to three months ago,” the Bank of Canada said. “Several companies – more than in recent quarters – noted an easing of labor market tensions. They described seeing reduced competition for labour, including less poaching, per compared to 12 months ago.
Notably, companies said they expect to raise wages by an average of 4.9% over the next year, up from 5.8% in the previous quarterly survey. While this decline is not good news for workers whose wages are not keeping up with inflation, it will be welcomed by the Bank of Canada, which fears that wage growth will continue to drive up prices, especially in the service sector.
“Companies could start telling the Bank of Canada what it wants to hear,” wrote Royce Mendes, head of macro strategy at Desjardins, in a note to clients. “While the balance of opinion among businesses still indicates that labor shortages remain a widespread problem, the intensity of these shortages has eased.”
The picture was less positive in the consumer survey. Short- and medium-term inflation expectations continued to rise, with the median saying inflation would be 7.1% in one year and 5.2% in two years. In five years, they expected inflation to be 3.4%, down slightly from the last survey.
While most consumers surveyed understand what the Bank of Canada is trying to achieve by raising borrowing costs, fewer people expect these measures to work, the central bank said.
“Canadians who don’t know the Bank of Canada’s inflation target think the target is above 5%, while even those who know it think the target is close to 3%,” said Benjamin Reitzes, Head of Canadian Rates Strategy at Bank of Montreal. , said in a note to customers. “If you’re looking for a reason for the BoC to remain very hawkish with its rhetoric, look no further.”
Consumer price index inflation has fallen in recent months, hitting 7% in August from a four-decade high of 8.1% in June. Statistics Canada will release September inflation data on Wednesday, which will speed up the Bank of Canada’s rate decision next week.
Bank of Canada Governor Tiff Macklem has said repeatedly in recent weeks that he plans to announce another rate hike. Royal Bank of Canada economist Claire Fan said Monday’s reports are unlikely to change that course.
“Despite improving signs in today’s survey results, price pressures are currently still too high and too broad to reverse quickly. And we don’t expect the Bank of Canada to ease the brakes on monetary policy until policymakers are confident that inflation will slow substantially and sustainably,” she wrote in a note to reporters. clients.
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