Bank of Canada points to the largest decline in business outlook since 2020

The central bank’s latest poll shows that sentiment among Canadian firms were down the most since the beginning of the pandemic: inflation expectations among consumers and businesses don’t seem to show any signs of easing.

The Bank of Canada’s business outlook indicator went down from 4.87 to 1.69 in the third quarter, marking the biggest deterioration in the confidence of Canadian firms since the second quarter of 2020.

“Many firms now predict slower sales growth as interest rates go up and demand growth changes towards pre-pandemic levels,” – the BoC’s report says. According to respondents, although they do see some prices easing, expectations of overall inflation are still elevated, with more than three quarters of firms expecting inflation to remain above 3%.

One more poll showed consumer expectations for short-term inflation reaching another record level.

The results point to a sharp erosion of business conditions, caused by a combination of a slowing economic growth, high inflation, and the BoC’s rate increases. Such a mix can complicate the central bank’s policy response and reduce the odds of reaching the so-called soft landing.

Most businesses and consumers believe we’ll see a recession during the next 12 months, caused by sharp rate hikes and high prices decreasing consumption. Both groups expect inflation to remain elevated over the next 1-2 years before getting back to the Bank’s target in the long term.

Although both groups share an opinion on inflation and the possibility of a recession, they look at wages differently.

Businesses reduced their average expected wage gain, with almost half not expecting abnormally high wage increase over the next 12 months. Meanwhile, consumer expectations for wage growth went up, with 40% of workers predicting pay gains of more than 4% during the same period.

As firms expect slower demand and don’t see large wage hikes, consumers say their wages aren’t keeping up with inflation and it probably will not change. As a result, they have to reduce their spending and change shopping habits. In addition to it, consumers see real wages declines and this is the main trigger of a recession.

The BoC’s next rate meeting is scheduled for October 26. Another rate increase by at least 0.5% is expected this time. Today, the Bank’s key lending rate is 3.25%, which is 3% higher than in March.