2 Bank of Canada surveys show that consumers and businesses expect high inflation to continue

Two surveys from the Bank of Canada on Friday show that while consumers and businesses still expect things like inflation and wages to be higher than normal for the foreseeable future, they are beginning to return to a sort of pre-pandemic normal – and they’re also less concerned about a recession.

According to the quarterly Business Outlook Survey, the central bank notes that Canadian companies are starting to notice demand for their products and services is declining from the unsustainable levels they reached earlier in the pandemic. Higher interest rates have had a “dampening effect” on companies, which now generally expect their revenue growth to be weak this year.

“One in five companies now expects an outright drop in turnover,” the central bank said.

That is why companies plan to spend less on investments in themselves in the coming period. After peaking in 2021 and 2022, so-called investment intentions are now back in line with their historical averages. Companies in the natural resources sector are still planning to open their wallets to keep up with demand, but most others are not.

“Investment intentions for other companies have declined and are weak. Weak demand, high construction costs and rising interest rates are increasingly weighing on companies’ plans,” the bank said.

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However, one area they expect to continue to spend is retaining and finding employees. “Reports of … labor shortages remain common,” the bank said, which is why more and more companies expect to hand out pay raises this year.

Overall, companies told the bank they expect to spend 4.48 percent more on labor this year. That’s lower than a peak of 5.8 percent reached around this time last year, but still high by historical standards.

“The good news is that companies no longer expect labor-related costs to exert upward pressure on price growth in the coming year,” said TD Bank economist Maria Solovieva.

In general, recession fears are starting to fade. In the first quarter of 2023, about half of the companies surveyed by the bank were planning a recession. That ratio fell to about a third in the second quarter.

While sales growth is expected to slow, along with concerns about an impending recession, that doesn’t mean companies aren’t planning to raise their prices.

While price growth is slowing, companies have not yet returned to their pre-pandemic pricing behaviors. “Several firms are still planning larger and more frequent price increases than they usually would in the coming year.”

While the latest CPI numbers released this week suggest that the inflation rate is heading in the right direction, the central bank’s report suggests it will be a long way to get back to the two percent target. Less than a fifth think it will happen by the end of next year. Nearly the same number – 16 percent – ​​think we won’t even be back to two percent by the end of 2027.

That’s not an encouraging sign for the central bank, said Scotiabank economist Derk Holt, “because when higher inflation is expected in demands and contracts, it can become a self-fulfilling prophecy that’s hard to contain.”

Consumers expect high inflation to continue

The second survey released by the central bank on Friday shows that consumers expect high inflation to continue for some time, even though they think the worst of the inflation-related problems may finally be behind them.

The bank’s quarterly survey of consumer expectations shows that consumers are still concerned about the high cost of living, but are less likely to believe that a recession is imminent.

“Expectations for the rise in the prices of some commodities, such as food, gasoline and cars, have declined from their peak,” the consumer report said.

“This may reflect the fact that fewer people now believe that supply chain issues are the main driver of high inflation. Consumers are also reporting increased promotional sales, particularly for groceries, after spending only a very long time in recent quarters. have seen little.”

The consumer survey suggested that cost of living was the biggest concern for Canadians, with most mortgage holders expecting their payments to rise when it comes time to renew.

“Most mortgage holders are confident that they will be able to make these higher payments, although this will further limit their discretionary spending,” the report said.

However, the percentage of Canadian consumers surveyed in the second quarter who think a recession is likely was 50 percent, up from 58 percent in the first quarter.

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It’s a similar story in the labor market, where workers told the central bank they’re voluntarily quitting their jobs earlier this year and are less concerned about losing their jobs involuntarily through being laid off.

About 40 percent of workers said their workload had increased compared to last year, and a major reason was staff shortages in the face of growing demand.

“These reasons suggest that some workplaces may require additional labor to meet demand,” the bank said.

Although lower than previous levels, expectations for wage increases for all types of workers are still higher than before the pandemic.

“Workers’ concerns about losing their jobs have faded and their expectations for wage increases remain very high,” said Desjardins economist Royce Mendes, noting that he thinks this is a good case for why more central bank action would be warranted. can be.

“Many Canadians don’t see enough economic pain on the horizon to get inflation back on target quickly… The slow progress in lowering inflation expectations coupled with the recovery in consumer confidence suggests that the Bank of Canada has more work to do. has to do.”