2 Bank of Canada surveys show consumers and businesses expect high inflation to stick around

Two surveys from the Bank of Canada Friday show that while consumers and business are still expecting things like inflation and wages to be higher than usual for the foreseeable future, they are starting to come back to some sort of pre-pandemic normal — and they’re less worried about a recession, too.

In its quarterly Business Outlook Survey, the central bank says Canadian businesses are starting to see demand for their products and services decline from the unsustainable levels they hit earlier in the pandemic. Higher interest rates have had a “dampening effect” on businesses, which overall now expect their sales growth to be weak this year.

“One in five firms now expects an outright decline in sales,” the central bank said.

Accordingly, businesses are planning to spend less on investing in themselves for the next little while. After spiking during 2021 and 2022, so-called investment intentions are now back in line with their historical averages. Companies in the natural resources sector still plan to open their wallets to keep up with demand, but most others are not.

“For other businesses, investment intentions have diminished and are weak. Soft demand, high construction costs and rising interest rates are increasingly weighing on firms’ plans,” the bank said.

Demand for workers

One area they expect to keep spending, however, is on keeping and finding workers. “Reports of … labour shortages continue to be common,” the bank said, which is why more and more businesses expect to hand out raises this year.

On the whole, businesses told the bank they expect to spend 4.48 per cent more on labour this year. That’s down from a peak of 5.8 per cent that was hit this time last year, but still high by historic standards.

“The good news is that firms no longer expect that labour-related costs will add upward pressure to … price growth over the next year,” TD Bank economist Maria Solovieva said.

Overall, fears of a recession are starting to fade. In the first quarter of 2023, about half of businesses surveyed by the bank were planning for a recession. That ratio dropped to about one third by the second quarter.

While sales growth is expected to slow along with worries about a looming recession, that doesn’t mean companies don’t plan on raising their prices.

“Although price growth is easing, businesses have not yet returned to their pre-pandemic price-setting behaviour,” the bank said. “Several firms are still planning to make larger and more frequent price increases in the coming year than they usually would.”

While the latest CPI numbers released this week suggest the inflation figure is headed in the right direction, the central bank’s report suggests it will be a long road to get back to the two per cent target. Fewer than one fifth think it will happen by the end of next year. Almost as many — 16 per cent — think we won’t even be back to two per cent by the end of 2027.

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

Consumers expect high inflation to persist

The second survey released Friday by the central bank shows that consumers expect high inflation to stick around for a while, even as they think worst of the problems related to inflation may finally be behind them.

The bank’s quarterly Survey of Consumer Expectations suggests that consumers are still worried about the high cost of living, but they’re less likely to think a recession is coming because of it.

“Expectations for the growth of prices of some goods, such as food, gasoline and cars, have eased from their peak,” the consumer report said.

“This may reflect the fact that fewer people now think supply chain issues are the main cause of high inflation. Consumers are also reporting noticing more frequent promotional sales, particularly for groceries, after seeing very few in recent quarters.”

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

“Most mortgage holders are confident they will be able to make these higher payments, though doing so will further constrain their discretionary spending,” the report said.

However, the proportion of Canadian consumers surveyed in the second-quarter report who think a recession is likely was 50 per cent, down from 58 per cent in the first quarter.

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It’s a similar story in the job market, where workers told the central bank they are more likely to voluntarily leave a job this year, and less worried about losing their job involuntarily by getting fired.

About 40 per cent of workers said their workload had grown compared to last year, and a major reason why was being short staffed in the face of growing demand.

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

While down from previous levels, expectations for wage gains are still higher for all types of workers than they were before the pandemic.

“Workers’ worries about losing their jobs have faded and their expectations for wage increases remain very high,” economist Royce Mendes with Desjardins said, noting that he thinks that’s a good argument for why more action from the central bank could be warranted.

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