Tiff Macklem, the Governor of the Bank of Canada, was present at the yearly gathering of federal, provincial, and territorial finance ministers in Toronto on Friday, December 15, 2023. The event was captured by THE CANADIAN PRESS/Nathan Denette.
In Ottawa, the Bank of Canada revealed in its latest quarterly survey that Canadian businesses are bracing for a slowdown in sales due to a tightening of interest rates, leading to diminished consumer spending. Despite rising concerns about wages, the survey indicated an anticipated easing of inflation. The report, covering the fourth quarter, disclosed that 38% of businesses foresee a potential recession in the next year, a notable increase from the previous survey. Similarly, 61% of consumers expressed recession fears, compared to 55% in the preceding quarter.
Businesses cited a drop in their order volumes compared to the previous year, with more firms expecting wage increases in the upcoming year. The business outlook indicator showed a marginal improvement in the final quarter of 2023, moving from -3.45 to -3.15, attributed to softened expectations for input and output prices.
The survey noted a gradual return to normal pricing behaviour among businesses, though it emphasized the expectation of higher-than-average wage growth over the next 12 months, often linked to cost-of-living adjustments. In December, the average hourly wage growth for permanent employees experienced its most significant year-on-year acceleration in almost three years.
The Bank of Canada had previously elevated rates to 5%, the highest in 22 years, and has maintained this level since July. In November, inflation stood at 3.1%, down from a peak of over 8% in 2022 but persistently above the bank's 2% target since March 2021. The upcoming announcement on January 24 is expected to maintain the current key policy rate, with predictions suggesting a potential rate cut in the first half of 2024.
Concerns were raised as 39% of businesses reported a decline in sales volumes over the past year, attributing it to factors such as slowing growth, the impact of higher interest rates, and inflation. A significant portion of businesses, 54%, anticipate inflation exceeding 3% in the next two years, while 42% foresee it below that threshold. Furthermore, 27% believe it will take more than four years for inflation to return to the target of 2%, a notable increase from the previous quarter's 18%.
While the Bank of Canada initially projected to reach the 2% inflation target by the end of 2025, Governor Tiff Macklem suggested a closer alignment with the target by the end of the current year. The survey acknowledged a slow decline in short-term inflation expectations, although businesses continue to anticipate elevated inflation due to factors such as wage growth and the costs of commodities, food, and housing.
A separate consumer survey by the Bank of Canada indicated that consumers do not anticipate further interest rate hikes in the next year. Consumer expectations for future inflation showed a decline, along with a moderated perception of current inflation, especially for essential goods like food and gas.
In summary, Canadian businesses brace for a sales slowdown amid tightened interest rates, with concerns about a potential recession on the rise. While businesses foresee easing inflation, they expect challenges in the form of elevated prices and wage growth. The Bank of Canada is expected to maintain its current policy rate in the upcoming announcement, with potential rate cuts in 2024.
