Canadian companies prepare for potential recession amid economic uncertainty

Bank of Canada's Aggressive Rate Hikes Influence Businesses and Consumer Sentiment

The latest business outlook survey from the Bank of Canada reveals that Canadian business sentiment continued to weaken during the third quarter, with companies expressing concerns over the prospect of reduced sales growth in the coming year. According to the survey released by the central bank on Monday, the business outlook survey indicator has reached its lowest level in over a decade, except for a brief period during the early stages of the COVID-19 pandemic when the economy was largely shut down.

Dampened Demand and Investment Plans: The report from the Bank of Canada notes that the slowdown in demand is placing pressure on businesses’ investment and employment plans. A substantial portion of companies participating in the survey stated that sales have declined over the past year due to a widespread decrease in demand. Rising interest rates are seen as a factor that could negatively impact both sales and investment plans.

Inflation Expectations and Recessional Concerns: The survey also indicates that inflation expectations among businesses have slightly decreased, although they remain above pre-pandemic levels. Many surveyed businesses anticipate that it will take more than three years for inflation to return to the Bank of Canada’s target rate of two percent. Approximately one-third of companies are making preparations for a potential recession in the upcoming year.

Consumer Inflation Expectations and Impact of Rising Interest Rates: Concurrently, the Bank of Canada’s survey of consumer expectations shows that consumer inflation expectations remain elevated. The report underscores a notable gap between perceived and actual inflation. Rising living costs remain a pressing concern for consumers, with many anticipating that the impact of higher interest rates on households is far from over. Consumers expecting adverse effects ahead are less inclined to plan major purchases.

Bank of Canada’s Rate Hikes and Outlook: Economists have noted that the Bank of Canada’s aggressive rate hikes appear to be having the intended effect, with both businesses and consumers anticipating a slowdown in economic activity. However, there is continued vigilance about inflation and wage expectations, which remain above target levels and are decreasing gradually. The overall downbeat sentiment in these surveys aligns with predictions that the central bank will maintain its current interest rate stance, coupled with a tightening bias.

Concerns Over Cost Increases: One notable aspect highlighted in the report is that some businesses are still passing along significant cost increases from the early stages of the pandemic to customers. However, the extent of this cost pass-through depends on competitive market pressures and the strength of consumer demand, both of which are becoming less favorable.

The Bank of Canada is scheduled to announce its next interest rate decision and release its monetary policy report on October 25. While the central bank held its key interest rate target at five percent last month, it has emphasized its readiness to raise rates if necessary to bring inflation back to its target of two percent.

Statistics Canada is expected to announce the annual inflation rate for September on the following day, shedding light on the nation’s economic landscape.

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