According to the Bank of Canada Business Outlook Survey (BOS) Canadian business sentiment remained downbeat in the fourth quarter of 2023. The BOS indicator, a statistical summary of survey results, was -3.15 in 2023 Q4, up only slightly from the post-pandemic low of -3.45 in 2023 Q3.
The pessimistic tone was broad-based across sectors and firm sizes. The share of firms preparing for a potential recession in the coming year remained the same (roughly one-third), but this quarter’s concerns are focused on demand, credit and uncertainty around economic conditions, rather than labour shortages and supply chains.
The good news is that both input and output price growth expectations are trending downwards, indicating some easing of inflationary pressures. Fewer businesses than last quarter plan larger-than-normal increases in their output prices. Importantly, the BoC cites that “firms’ pricing behaviour is slowly returning to normal”. The Bank has previously cited this as a force keeping inflation elevated.
Anticipated wage growth has slightly decreased, with fewer firms reporting pressure to increase wages due to cost of living adjustments or retention issues. Still, businesses expect their wage adjustments to be higher than average over the next 12 months with roughly three-quarters of firms expecting wage growth to return to normal by 2025.
Results in the parallel Canadian Survey of Consumer Expectations (CSCE) showed Canadian consumers have grown more pessimistic about the economy, with heightened concerns about cost of living increases in the near term. The perception of current inflation cooled only slightly to 5.9% from 6.6% in Q3, but expectations for inflation in the long-term have fallen further below the historical average.
As a result of continuous price gains, households are reducing or postponing purchases. In addition, more consumers reported that higher interest rates are increasingly affecting their spending behaviour and worsening their financial situation. These two factors remained key in affecting consumers’ perception of the economy, making them increasingly worried about the future.
Reflecting this increasing concern about future prospects, consumer confidence in the labor market softened. Despite this, expectations for wage growth roughly unchanged at a high level.
Key Implications
Both businesses and consumers continue to be concerned about elevated prices and high interest costs. The reduction in consumer spending is becoming more widespread and is being felt more acutely by businesses that are now increasingly affected by competitive market pressures and weakening consumer demand.
As we see from both surveys, despite economic concerns, wage growth is likely to remain elevated in 2024. It is also becoming more apparent that the gap between consumers’ perception of inflation and actual price changes is creating a real communication challenge for the Bank of Canada as it prepares to step on the path of rate cuts. According to the consumer survey, persistently high expectations for inflation for services such as rent may be slowing progress in returning overall inflation expectations to a historic norm. As we noted in our recent report, the Bank of Canada should shift its public messaging to highlight that housing expenses are not the sole determinants of Canada’s wider inflation patterns. Failing to make this distinction risks curtailing economic growth by too much.
