The Bank of Canada says business and consumer confidence remained subdued in the second quarter, even as the country saw its first interest rate cut in several years.
The central bank’s consumer survey, released Monday, shows financial stress remained high in the spring and Canadians presented a pessimistic outlook for the economy.
Those prospects have prompted many people to cut spending, pay down debt, move savings to accounts with higher interest rates and seek to increase household income, the bank said.
“One thing we’ve said a lot as rates have started to rise and mortgages have started to adjust upward is that Canadians will pay down their mortgage first, but will likely reduce those discretionary items – there’s even more evidence of that here,” Robert Kavcic, a senior economist at Bank of Montreal, said in a note to investors.
The sentiment was the same among business owners.
The central bank’s business survey, also released Monday, found that executives remain more pessimistic than average and their capital spending plans are below average.
Business leaders blamed their sentiment on high interest rates, persistently high costs and weak demand, particularly for non-essential goods and services.
They noted that consumers are price sensitive and often shop around for cheaper products or look for discounts before deciding to purchase.
Easing of inflationary pressures expected
Despite the mixed sentiment, at least one analyst saw some bright spots in the surveys.
“Corporate pricing plans also appear to be normalizing, with fewer firms expecting unusually large price increases and more firms expecting to hold prices steady,” Andrew Grantham of CIBC Economics wrote in a note to investors.
“This expected easing of inflationary pressures will be welcome news for the Bank of Canada as officials decide whether to cut interest rates this month,” he added.
The key rate has been at 4.75% since June, when the bank made its first rate cut since March 2020. Its next rate decision is scheduled for July 24.
Mr Grantham believes another quarter-percentage point cut will follow soon. He said the release of new inflation data on Tuesday could weigh on future rate moves.
If Tuesday’s announcement shows that inflationary pressures have eased, “the Bank of Canada will have more reason to cut rates again,” TD Bank economist Maria Solovieva said in a note.
She added that there is currently a 78% probability of a rate cut in July.
Relaxation of the labor market
As the central bank considers its next move, businesses tied to essential spending said they are doing better because they see population growth continuing to benefit their sales, the survey found.
Firms across all regions and sectors also reported that the labor market continued to ease, with the share of firms facing labor shortages near survey lows.
The intensity of remaining shortages is at its lowest level since 2009, added BMO’s Kavcic.
“This survey made it even clearer that the Canadian labour market is no longer tight and may even be easing significantly,” he said. “Hiring intentions weakened in the second quarter to the low end of the historical range, which is not recession territory but consistent with periods of weak growth and easing by the Bank of Canada.”
The bank attributed the “broad-based easing” to lower sales expectations, meaning less demand for workers, and an increased supply of employees due to immigration.
Fewer companies also told the bank they were preparing for a recession. Their focus is now on taxes and regulations, which they see as slowing down their business plans.
On the consumer side, the bank’s research found that homebuying intentions were close to the historical average, as many Canadians, including newcomers, said they planned to enter the market soon.
When consumers were asked what was driving their desire to purchase, most said they felt property affordability was improving while others noted rising rental prices, which they felt made buying a property and paying off their mortgage more attractive.