Business sentiment in Canada continues to weaken

Results from the fourth-quarter 2022 Business Outlook Survey and the Business Leaders’ Pulse surveys from October 2022 through January 2023 show that business sentiment has continued to weaken, said the Bank of Canada on Monday.

“As a result of rising interest rates, firms’ sales expectations and investment plans are softening. Capacity pressures have moderated from elevated levels. In this context, firms expect a slower pace of price increases,” it said.

The Bank said:

• Rising interest rates are dampening firms’ sales expectations and plans to invest. Firms also link their weaker outlook on demand to high inflation eroding consumers’ spending power and to the possibility of a recession. More businesses than usual expect their sales to decline;
• Amid softer demand and recent improvements in supply chain issues, pressures on businesses’ production capacity have eased from high levels; and
• Firms continue to expect inflation to be above the Bank of Canada’s inflation target in the short term. Businesses anticipate slower growth in their input and output prices, mainly due to falling commodity prices and weakening demand. Many firms are gradually returning to price-setting practices they used before the pandemic. In particular, they are reducing the size and frequency of their price changes relative to the past year.

“Business sentiment has deteriorated again. In an environment with softening demand and moderating capacity constraints, results for almost all survey questions used to calculate the Business Outlook Survey (BOS) indicator have decreased. The BOS indicator declined this quarter to roughly zero. This level is slightly below the average of the past 10 years, suggesting business confidence is somewhat weaker than usual,” said the Bank of Canada.=

“For the fourth consecutive quarter, businesses anticipate their sales growth will slow. For more than one-third of all firms, this is after significant sales increases over the past year. Close to three in 10 businesses—considerably more than usual—expect their sales to decrease with most attributing the decline to weaker domestic demand. Of firms expecting lower sales, many have already seen a deterioration in their future sales indicators (e.g., sales inquiries and order books) compared with 12 months ago. Several firms reported that rising interest rates are slowing demand related to housing activity and household consumption. Other businesses linked their softer sales outlook to high inflation reducing household spending and to expectations for a recession.

“Still, overall, firms anticipate that their sales will continue to grow. Businesses tied to commodities expect robust demand, which some linked to elevated commodity prices. A few exporters reported that the weaker Canada–US exchange rate has a favourable effect on their sales outlook.”

Claire Fan, Economist, Royal Bank of Canada, said more businesses expect it to take longer for inflation to return fully to the BoC’s two per cent target – over 40 per cent of businesses surveyed expected inflation to return to two per cent only in 2026 or beyond.

“But the average expected inflation rate over the next two-to-five years still ticked lower, and so did expected growth for input and output prices over the next year. Key capacity constraints – namely labour and supply chain bottlenecks also eased more significantly. That combined with softening demand is adding more weight to the expectation that current positive inflation trends will persist, starting with tomorrow’s December inflation report,” said Fan.

Shelly Kaushik, Economist, BMO Economics, said the BoC’s aggressive rate hikes through 2022 have clearly weighed on economic sentiment among both businesses and consumers.

“However, still-elevated inflation expectations will keep the Bank on alert. This survey is consistent with our call of a 25 bp rate hike at next week’s meeting, after which we anticipate the Bank will hold interest rates steady through the remainder of 2023,” said Kaushik.

James Orlando, Senior Economist, TD Economics, said business confidence in the economic outlook has clearly weakened.

“With most consumers and businesses anticipating a recession within the next 12 months, spending intentions keep falling. This is pushing hiring plans lower, which should ease future wage pressures. The BoC will likely be pleased to see the easing of inflation expectations from businesses, though further improvement in inflation data will be needed to convince consumers of the same,” said Orlando.

“The BoC will be relying on these reports as it prepares for its interest rate decision next week. Though the outlook has weakened, recent economic data have shown incredible resiliency. This sets the stage for a final 25 basis point hike, before the Bank moves to the sidelines to observe the full effect of its historic rate hiking cycle on the economy.”

(Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He worked for 35 years at the Calgary Herald, covering sports, crime, politics, health, faith, city and breaking news, and business. He works as well as a freelance writer for several national publications and as a consultant in communications and media relations/training. Mario was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list)