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Inflation expectations among businesses are gradually declining, but remain elevated
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Recession expectations by both Canadian businesses and consumers fell in the second quarter, the Bank of Canada said June 30 in its latest Business Outlook Survey, with the economy proving resilient despite high inflation and increasing interest rates.
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One-third of companies are planning for a recession, according to the central bank’s second-quarter survey, down from half of them in the first quarter. Despite the more positive outlook on that front, business sentiment dropped to 27 per cent in the second quarter from 34 per cent in the first quarter because more companies see slowing demand as a widespread concern.
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Inflation expectations among businesses are gradually declining, but remain elevated, with inflation still expected to be at 3.7 per cent in two years. The latest inflation reading was 3.4 per cent in May.
As well, the share of businesses that expect high inflation to persist for five years or longer grew in the second quarter to 16 per cent, from seven per cent in the previous quarter.
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“They see inflation being held up by high government spending and strong demand,” the report said.
They see inflation being held up by high government spending and strong demand
report
In a separate consumer survey, 50 per cent said they believe a recession is likely, down from 58 per cent in the first quarter. Consumers also said they are beginning to see the worst of inflation come down despite concerns about the rising cost of living and mortgage renewals, though their near-term expectations remain elevated.
The central bank has raised interest rates nine times out of its 11 deliberations since March 2022 as inflation accelerated well outside its year-over-year target of one to three per cent, peaking last June at 8.1 per cent.
The governing council temporarily paused rate hikes in March and April this year as inflation began cooling, but stronger-than-expected economic growth in the first quarter and continuing tightness in the labour market prompted the Bank of Canada to hike the overnight policy rate to 4.75 per cent on June 7. The last time the rate was this high was in April 2001.
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In the business survey, one in five companies said they expect outright sales declines over the next 12 months, which indicates the dampening effect of higher interest rates on demand has spread beyond the housing and real estate sector, according to the Bank of Canada.
“Businesses linked directly and indirectly to consumer discretionary spending also think that high interest rates have curbed sales of their products and services and that this trend will continue,” the report said.
The strength in May still suggests that another interest rate hike is likely next month
Olivia Cross
Statistics Canada published gross domestic product data on June 30 which showed the economy regained momentum in the second quarter. The agency revised March GDP up to 0.1 per cent and April growth was flat, namely due to the federal public service strikes that month.
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An advance estimate showed the economy grew 0.4 per cent in May, so even if GDP remained unchanged in June, the annualized rate would be 1.3 per cent in the second quarter, higher than the central bank’s forecast of one per cent, Olivia Cross, assistant economist at Capital Economics Ltd., said.
“While growth was probably still below the economy’s potential, the strength in May still suggests that another interest rate hike is likely next month,” she said in a note to clients.
New GDP figures along with a fresh set of labour data to be released the week before the Bank of Canada’s next decision on July 12 will factor into policymakers’ call on whether to hike interest rates again.
The job numbers in May indicated the labour market shed more than 17,000 positions while the unemployment rate rose 0.2 percentage points to top five per cent for the first time in nine months. But the job losses weren’t statistically significant enough to declare a meaningful drop, Statistics Canada said in an email.
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Businesses surveyed by the Bank of Canada said labour shortages are not as intense as they were 12 months ago because there’s less competition in the labour market and an increase in the number of workers, something boosted by the recent growth in immigration.
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But the consumer survey said Canadians still feel confident in the labour market.
“The perception of a healthy labour market following several interest rate hikes may be another reason why consumers are less pessimistic about the economic outlook this quarter than in the previous quarter,” the Bank of Canada said.
• Email: bbharti@postmedia.com | Twitter: biancabharti
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