Bank of Canada surveys show business optimism is weak but improving, with fewer firms anticipating a recession despite increased concerns about uncertainty.
Monday’s reports on business sentiment indicate higher interest rates continue to impact business activity, but Canada’s large firms are less worried about a sharp decline in growth.
While higher borrowing costs are limiting sales growth, they’re also helping to standardize firms’ pricing behaviors, moderate wage growth, and re-establish inflation expectations.
Another survey revealed that consumers’ short-term inflation expectations remain above the central bank’s 2 per cent target, which is a warning for policymakers considering when to decrease their benchmark overnight rate from restrictive levels.
The central bank’s business outlook indicator rose to minus 2.4 in the first quarter, up from minus 3.1 previously. Firms continue to report weakened demand conditions, the bank said, and about 27 per cent of firms expect a recession, down from 37 per cent in the previous quarter.
About 56 per cent of firms listed uncertainty as their top concern, up from 52 per cent previously, driven by interest rates, input costs, and general domestic economic growth. Concerns about cost pressures and demand for sales also continue to rise.
Investment intentions dropped sharply, with just 33 per cent of firms expecting to spend more on machinery and equipment over the next year, down from 41 per cent previously. In addition to uncertainty, firms say soft demand, high borrowing costs, and “fewer binding capacity constraints” are limiting investment plans.
Inflation expectations among Canadian large firms remain high but are gradually decreasing, the bank said — 27 per cent of firms expect yearly price pressures to exceed 2 per cent beyond the next three years, down from 37 per cent previous.
Labour market conditions continue to loosen and businesses expect wage growth to be 4.1 per cent — slower than it was in the previous 12 months, but higher than historical averages. Just 22 per cent say labor shortages are restricting their ability to meet demand, and 43 per cent of firms say they expect their workforce to expand, up from 37 per cent previously.
“Normalization of wage setting remains a gradual process,” the bank said.
Corporate price-setting behavior continues to normalize, officials said, and fewer firms are planning on making larger or more-frequent-than-normal price increases.
In the survey of consumer expectations, near-term inflation expectations remained largely unchanged from the previous quarter and are still well above the Bank of Canada’s 2 per cent target for inflation. Importantly, progress on long-term inflation expectations reversed course and increased at the beginning of the year: 5-year-ahead inflation expectations rose to over 3 per cent.
With interest rate expectations declining, intentions to buy a home have increased compared to last year despite elevated mortgage costs, high home prices, limited housing availability, and considerable difficulty for renters to save for a down payment.
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The percentage of people planning to buy or thinking about buying a house or condo increased to 15%, up from 13% in 2023. The percentage of renters planning to buy in the next 12 months rose to 18%, up from 17% last year.
At their rate decision on March 6, the members of the central bank’s six-person governing council said it was “still too early” to think about reducing borrowing costs. They ultimately kept the policy rate at 5% for a fifth consecutive meeting.
Economists surveyed by Bloomberg anticipate that the Bank of Canada will begin to decrease borrowing costs in June. The central bank’s next meeting is on April 10.
