Poll shows businesses expect weaker economic performance before the next rate decision

The latest survey by the Bank of Canada shows a negative outlook for Canadian businesses for the first time since 2020. Consumer expectations for inflation are slightly weaker but still elevated.

The first quarterly reports since the BoC announced a pause in its rate increase cycle show that businesses and consumers expect a mild recession for Canada during the next 12 months, with wage expectations remaining high amid tight conditions in the labor market.

According to the report, the central bank’s business outlook indicator was down to -1.1 in the first quarter, following the previous 0.1. Firms predict slower sales growth for the fifth consecutive poll, restrained by higher interest rates, high inflation, and worries about a recession.

Such results show that the Bank’s aggressive rate hikes of the previous year are really reducing inflation expectations and beginning to cool the national economy. As you know, Governor Tiff Macklem kept the Bank’s key lending rate unchanged at 4.5% in March. The next rate meeting is scheduled for April 12.

Almost half of the firms have included the risk of a recession this year in their business plans. In their opinion, any possible downturn will be mild. Some are not planning to add staff or increase investment spending.

“Today’s reports should force the central bank to keep the rate unchanged,” – James Orlando, an economist at Toronto-Dominion Bank, noted. Although economic growth, employment, and consumer spending have shown increases lately, Orlando believes that “if consumers and businesses change their behavior based on forecasts of a slowdown, it becomes a self-fulfilling prophecy. It means that the sequence of several surprises will not last long.”

Consumers expect certain relief in the real estate market as they predict sooner-than-anticipated rate declines. As the BoC has announced the pause in its rate hike cycle, housing prices are expected to go up slightly during the next 12 months.

The poll was conducted before the crash of U.S. regional banks and the government takeover of a European banking giant hit the global financial markets. Nevertheless, according to the Bank of Canada, supplemental questions since then showed that the results almost didn’t change.