Business Outlook Sours in Canada, Complicating Rate Path


Canadian business sentiment fell to its lowest since the Covid-19 pandemic in a central bank survey, while consumer expectations for short-term inflation held at a record high.

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(Bloomberg) — Canadian business sentiment fell to its lowest since the Covid-19 pandemic in a central bank survey, while consumer expectations for short-term inflation held at a record high.

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Data released Monday by the Bank of Canada show the economy adjusting to high interest rates and heading to a period of weaker growth or even a mild recession. More businesses than usual expect their sales to decline, and consumers have reduced their spending plans.

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The central bank’s business outlook indicator fell to 0.07 in the fourth quarter, from a revised 1.74 previously. Firms said rising interest rates and high inflation are crimping their outlook for demand and plans to invest. About 70% expect the economy to enter a recession.

Higher rates and inflation have also limited the ability of consumers to spend, the bank said in a separate survey. Most workers don’t expect their earnings to catch up with recent price pressures, and about half of households think they will be negatively affected by a potential recession.

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About half of consumers who expect a recession think it will be moderate in severity and length, while 90% of businesses expect a likely downturn to be mild.

The surveys highlight a rapid erosion of business conditions, brought on by a combination of a slowing economic momentum, high inflation and one of the most forceful tightening cycles in the history of the central bank.

Governor Tiff Macklem and his officials have slowed down the pace of rate hikes and signaled that future decisions will depend on economic data. The central bank has already raised borrowing costs by 4 percentage points since last March, bringing the benchmark overnight rate to 4.25%.

The pair of surveys and December’s inflation report from Statistics Canada — due 8:30 a.m. Tuesday in Ottawa — are the final major inputs into the central bank’s Jan. 25 policy decision. Before Monday’s release, traders in overnight swaps markets were putting the odds of a 25-basis-point hike at more than 80%.

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The yield on benchmark two-year Canada bonds was at 3.596% as of 10:38 a.m. Ottawa time, in line with its level before the data release. 

The contrast between the deteriorating business outlook and a recent string of stronger-than-expected economic data complicates the bank’s policy response. Macklem’s path to achieving a so-called soft landing becomes narrower if rates have to go higher to cool demand and consumer prices.

While the headline annual inflation rate eased in November, underlying price pressures trended higher. Early estimates suggest the economy is on track to expand at an annualized rate of 1.2% in the last quarter of 2022 — more than double the Bank of Canada’s forecast. Last month, the labor market blew past expectations and added more than 100,000 jobs, while the unemployment rate fell to near a record low of 5%.

Four out of Canada’s six biggest bank now expect another rate increase from Macklem, with Canadian Imperial Bank of Commerce and Royal Bank of Canada changing their forecast after the blowout jobs report.

(Updates with two-year yield in ninth paragraph)


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