By Paul Vieira
OTTAWA–Business confidence in Canada hit a new postpandemic low in the third quarter, with companies reporting a deterioration in the sales outlook and strains on meeting short-term financial commitments due to higher interest rates, according to a Bank of Canada survey.
Inflation expectations among companies surveyed by Canada’s central bank eased slightly, but remained historically elevated, with 53% indicating the consumer-price index would be at 3% or higher over the next two years.
The Bank of Canada released the results of its quarterly Business Outlook Survey on Monday, along with another measuring consumer expectations. The findings provide senior Bank of Canada officials with data they closely review before issuing its next interest-rate decision, which is scheduled for Oct 25. The Bank of Canada kept its benchmark interest rate unchanged at 5% last month, saying the economy had entered a weaker phase. However, the central bank said it remained concerned about persistent underlying inflationary pressures and stood ready to lift rates further.
Analysts said the business and consumer survey results should provide the Bank of Canada with confidence that higher rates are working as intended in slowing economic activity. “We don’t think there’s enough evidence to suggest that the economy requires higher interest rates,” said Royce Mendes, an economist at Desjardins Securities.
Bank of Canada Governor Tiff Macklem said last week that the run-up in long-term rates in financial markets were no substitute for a rate-policy aimed at bringing inflation down to the central bank’s 2% target.
Inflation data for September are scheduled for release on Tuesday. In August, inflation rose 4%, after dipping below the 3% mark in June. The Bank of Canada sets interest rates to achieve and maintain 2% inflation. In response, it has lifted rates by 4.75 percentage points since March of last year, one of the most aggressive rate-hiking campaigns among developed-world central banks.
Higher rates are affecting the majority of Canadian companies surveyed. Over 70% of firms in the goods and services sectors said higher rates are negatively affecting them.
“While most businesses remain confident that they can repay existing debts, firms that said interest rates are critical to their operations reported having greater difficulty meeting their short-term financial obligations,” the survey said.
Businesses also reported a slowing in consumer demand, with the survey noting that one-third of respondents reported a decline in sales over the past 12 months. Based on indicators such as sales inquiries and order books, companies said the outlook for sales over the next year had deteriorated compared with the previous quarter. Still, 42% of companies said they expected sales volume to rise over the next 12 months, versus 28% who anticipate a decline.
All told, the survey’s indicator of business confidence declined to -3.51, or the lowest level in over a decade except for a brief period early in the Covid-19 pandemic. The lower reading, the central bank said, reflected weaker indicators of future sales and reduced hiring and investment plans, among other things.
“We have already seen excess demand dissipate more quickly than projected,” TD Securities said, in reference to the central bank’s projections issued in the summer for consumer spending. The survey results “should emphasize that the risk of hard landing has increased over the last three months.”
The Bank of Canada, along with the Federal Reserve, are trying to engineer a so-called soft landing, in which rates rise to dampen economic activity without triggering a recession. A hard landing, meanwhile, is a recession triggered by overly tight monetary conditions.
The survey said one in three businesses expect a reduction in capital spending over the next 12 months, citing tighter credit conditions, and that hiring intentions are below their historical average. Nonetheless, the survey added only 12% of companies plan to cut staff.
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