Firms report weak demand and excess capacity, while over 70% expect inflation to normalize soon
The Bank of Canada’s business and consumer surveys indicated that inflation expectations are stabilizing, while few firms plan to hire or invest due to weak demand, as reported by BNN Bloomberg.
The central bank’s business outlook indicator rose slightly to minus 2.3 in the third quarter from minus 2.9 previously. Companies showed a more positive outlook on future sales, with fewer firms reporting declines in orders, bookings, and sales inquiries.
The central bank noted in its quarterly release that “demand is weak, firms have excess capacity, and price growth continues to weigh on the economy.”
Investment and hiring plans remain below average, as firms focus on replacing existing capital instead of expanding productive capacity or improving efficiency.
Inflation expectations among businesses are normalizing, with more than 70 percent predicting annual price pressures to remain within the Bank of Canada’s target range of 1 to 3 percent over the next two years, the highest proportion since the first quarter of 2021.
Despite these improvements, the surveys reflect a slow economic recovery. Excess capacity remains, and this may contribute to continued disinflationary pressures.
Shelly Kaushik, an economist at the Bank of Montreal, stated that cooling inflation and wage expectations mean “the bank can feel comfortable focusing on reducing policy restrictiveness.”
She added that these reports continue to lean “dovish,” leaving open the possibility of a 50 basis-point rate cut.
Labour shortages are below the historic average, with only 18 percent of businesses citing a lack of available workers as a constraint on meeting demand. However, the intensity of labour shortages has decreased, and firms report muted expectations for wage growth.
Top concerns among businesses include economic growth, elections in Canada and the US, cost pressures, tax policies, and regulations, all contributing to uncertainty in the business environment.
The Bank of Canada has already cut interest rates by a quarter percentage point at its last three meetings, bringing the overnight interest rate to 4.25 percent. Markets and economists expect further rate cuts as the economy weakens.
In a separate survey, the central bank reported that consumer inflation expectations have also declined, with some measures returning to pre-pandemic levels. Wage growth expectations fell for the first time since the second quarter of 2023.
