Businesses see fewer hiring and investment plans as inflation normalizes, signalling ongoing economic strain
The Bank of Canada’s recent business and consumer surveys reveal that inflation expectations are normalizing, with few businesses planning to hire or invest amid weak demand, as reported by BNN Bloomberg.
The central bank's business outlook indicator showed a slight increase, rising to minus 2.3 in the third quarter from minus 2.9 previously. Businesses expressed a more optimistic view of future sales, with fewer firms seeing declines in orders, bookings, and sales inquiries.
“Demand is weak, firms have excess capacity, and price growth continues to weigh on the economy,” the Bank of Canada stated in its quarterly business outlook survey released Friday.
Despite the modest improvement in outlook, investment and hiring plans remain subdued.
Businesses expect to focus on replacing existing capital over the next year, with little interest in expanding capacity or improving efficiencies. Hiring intentions are similarly soft, reflecting the overall cautious stance of firms.
More than 70 percent of companies reported inflation expectations within the Bank of Canada’s target range of 1 to 3 percent for the next two years, marking the highest proportion since early 2021.
These results suggest a gradually improving but still fragile business environment, which remains impacted by higher interest rates. The ongoing excess capacity in the economy is expected to contribute to disinflationary trends.
“Cooling inflation and wage expectations mean the bank can feel comfortable focusing on reducing policy restrictiveness,” said Shelly Kaushik, an economist with the Bank of Montreal, in a report to investors.
Kaushik also pointed out that the data supports a “dovish” stance, keeping the possibility open for a 50 basis-point rate cut.
Labour shortages appear less severe, with only 18 percent of businesses citing a lack of available workers as a significant issue. The intensity of these shortages is also decreasing, and firms reported a muted outlook for wage growth.
Businesses highlighted several areas of concern, including economic growth, the upcoming elections in the US and Canada, cost pressures, tax policy, and regulatory issues, all of which are contributing to uncertainty.
The Bank of Canada has lowered interest rates by a quarter percentage point in each of its last three policy decisions, bringing the overnight rate to 4.25 percent. Both markets and economists anticipate further rate cuts as economic conditions remain weak.
The business outlook survey was conducted in August, before the central bank’s third consecutive rate cut in September.
In a separate consumer survey, the Bank of Canada found that inflation expectations among consumers also continued to fall, with some measures returning to pre-pandemic levels. Wage growth expectations dropped for the first time since the second quarter of 2023.
