With high inflation and interest rate hikes eating away at consumers’ paychecks, businesses expect sales to slow, two Bank of Canada polls released Monday show.
Both businesses and consumers expect to see a recession within the next 12 months, according to the central bank’s Business Outlook Survey and Consumer Expectations Survey.
As business demand weakens, a growing number are viewing demand and credit as pressing concerns. At the same time, they say cost pressures, labor shortages and supply chain issues are easing.
On the consumer side, Canadians faced with inflation and higher interest rates are cutting back on spending, as they have to spend more of their budget on basic necessities.
Nearly nine in ten consumers said they had reduced their spending on travel, accommodation, food and entertainment.
More than seven in ten respondents say they have reduced their purchases of clothing and shoes, while nearly six in ten consumers have scaled back their grocery purchases.
Both central bank polls “suggest that interest rate hikes are working as expected to slow spending,” CIBC’s managing director of economics Karyne Charbonneau wrote in a note to clients.
Since March, the Bank of Canada has raised its key interest rate aggressively seven times in a row, to fight against the highest inflation in several decades. Its key rate is currently at 4.25%, its highest level since 2008.
Although annual inflation has fallen in recent months, it remains well above the Bank of Canada’s target of 2.0%.
The central bank should keep interest rates high for some time to further dampen the economy and inflation.
A widely expected recession
With a somewhat gloomy economic outlook, some companies are expecting a slowdown in sales and are abandoning their investment plans.
Although two-thirds of companies expect a recession in the next 12 months, half of companies indicated that they plan to increase their workforce or fill vacancies in the same period.
Meanwhile, 72% of consumers expect a recession.
Despite the widespread prediction that a recession is likely, polls show that most consumers and businesses don’t think it will be significant.
This is consistent with what many economists predict for the Canadian economy, citing the strength of the labor market as a potential cushion in the event of a downturn.
However, although the labor market remained relatively strong, Canadian workers saw their real wages fall in the context of high inflation. According to the Consumer Expectations Survey, most workers do not expect their income to catch up with inflation.
Surveys also show that businesses and consumers expect inflation to remain high in the near term, but expect it to decline in five years to approach the 2.0% target. of the central bank.
More than a quarter of consumers expect to see deflation five years from now, with many believing prices will decline as the economy recovers from supply-side shocks.
Royal Bank Deputy Chief Economist Nathan Janzen said it was “astonishing” to see the number of people expecting lower prices over the long term.
“I don’t know if being so optimistic is going to make it happen. It is more difficult for prices to fall than to rise,” he noted.
The Bank of Canada’s survey results come ahead of its next interest rate decision, scheduled for Jan. 25.
Although the central bank mentioned last month its intention to suspend the cycle of rate hikes, many commercial banks, including the Royal, expect to see it increase its key rate by another quarter of a point. percentage.
“I don’t think that has changed with this data,” said Janzen.
Statistics Canada is due to release its inflation report for December on Tuesday, which will also inform the central bank’s decision, he added.