Bank of Canada surveys find weakening business outlook ahead of next week’s rate decision
Business sentiment in Canada continues to worsen with companies expecting sales growth to slow over the coming year and inflation to remain elevated until at least 2025, according to the Bank of Canada’s quarterly business survey.
At the same time, companies are reporting improvements in labour shortages and other supply constraints, while many expect wages to keep rising quickly.
The Business Outlook Survey and its companion Survey of Consumer Expectations, both published Monday, show Canadians remain nervous about the economy, despite stronger-than-expected growth at the start of 2023.
This should reinforce the Bank of Canada’s decision to pause further interest-rate hikes, and sets the central bank up to keep its benchmark rate at 4.5 per cent at the next monetary policy decision meeting on April 12.
Around half of the respondents to the business survey expect a mild recession this year, as higher interest rates curb consumer spending. Almost 60 per cent of the respondents to the consumer survey expect a “small” or “significant” economic decline over the next 12 months.
This aligns with the central bank’s forecast of near-zero growth over the first three quarters of 2023.
The bank is actively trying to engineer an economic slowdown to bring high inflation back under control. So far, however, the Canadian economy has proven surprisingly resilient in the face of eight rate hikes since March, 2022.
Statistics Canada reported last week that GDP grew 0.5 per cent in January compared with the previous month, and a preliminary estimate showed a further 0.3-per-cent growth in February. This was more than the central bank or Bay Street analysts were expecting.
“Today’s releases should encourage the Bank of Canada to remain on hold at its policy announcement next week,” James Orlando, Toronto-Dominion Bank’s director of economics, wrote in a note to clients Monday.
“Granted, GDP growth, employment data, and consumer spending have surged recently. But, if consumers and businesses adjust their behaviour in preparation of a slowdown, it becomes a self-fulfilling prophecy. This implies that the string of positive surprises won’t last much longer.”
The surveys were conducted in late January and February, which means they don’t capture any knock-on effects from the recent convulsion in the U.S. banking sector. However, follow-up interviews conducted by the central bank found that business conditions have not changed much as a result of the banking stress.
Canadian businesses and consumers continue to expect inflation to remain worryingly high, although these expectations have declined over the past several quarters alongside the actual fall in Consumer Price Index inflation. Annual CPI inflation was 5.2 per cent in February, down from a peak of 8.1 per cent last June.
The average respondent to the business survey expects inflation to be 3.9 per cent in two years’ time. That’s nearly twice the Bank of Canada’s 2-per-cent target.
Consumers, meanwhile, think that inflation will still be running at 4.27 per cent in two years. Most respondents blamed supply chain disruptions for high inflation, the Bank of Canada said, although many also pointed to high government spending.
The central bank cares about inflation expectations because beliefs about future prices can affect company price-setting decisions and employee wage demands in a self-fulfilling manner.
While many companies were downbeat about their future sales growth, business conditions have improved in several key areas. Crucially, labour shortages have become less intense and companies are less worried about meeting an unexpected surge in demand.
“Firms indicated that it has become easier to find the workers they need. They attribute this to less competition for labour and an improved labour supply,” the Bank of Canada said, pointing to increased immigration.
“For the first time in several quarters, businesses no longer expect labour costs to put upward pressure on their output price growth,” the bank added.
Even with less competition for workers, businesses still expect to raise wages quickly this year, by an average of 4.7 per cent. That’s down from a peak of 5.8 per cent in the second-quarter 2022 survey, but well above the prepandemic average of around 3 per cent.
Consumers remain upbeat about their job prospects, although they don’t think that their wages will keep up with inflation. They also reported feeling worse about their finances compared with previous periods of rising interest rates.
Canadians are being squeezed by a combination of rising prices and higher borrowing and debt-service costs. That’s leading some consumers to dial back spending plans.
“About one-third of consumers expect to travel less often, eat out less often and enjoy fewer paid entertainment or social activities in the next 12 months than they did in the previous 12 months. This is largely because of the high prices of these services and other essential purchases,” the bank said.
Are we in a recession right now? What economists have to say – USA TODAY
Over the past year, economists have proclaimed that the U.S. is headed toward recession so relentlessly, you might think we’re already knee-deep in a slump.
But the economy has been remarkably resilient and, though wobbly at times, has repeatedly defied forecasts of a downturn. Economists, in turn, have continued to push out their estimates of when a recession will begin.
Yet forecasters still say there’s a 61% chance of a mild slide this year, according to those surveyed by Wolters Kluwer Blue Chip Economic Indicators.
All this begs the question: Are we in a recession now?
What happens in a recession?
Many Americans are familiar with the informal definition of a recession: Two straight quarters of declining gross domestic product, which is the value of all goods and services produced in the U.S.
But the real litmus test is more subtle. A recession is “a significant decline in economic activity that is spread across the economy that lasts more than a few months,” according to the National Bureau of Economic Research. NBER looks at a variety of indicators, particularly employment, consumer spending, retail sales and industrial production. The non-profit group often announces when a recession has begun and ended months after those milestones have occurred.
GDP fell each of the first two quarters of 2022 but much of the drop was traced to changes in trade and business inventories – two categories that don’t reflect the economy’s underlying health.
Why do economists expect recession?
Over the past 14 months, the Federal Reserve has raised interest rates at the fastest pace in 40 years to bring down inflation. Typically, when the Fed hikes rates so aggressively, borrowing to buy a home, build a factory and make other purchases becomes much more expensive. Economic activity declines, the stock market tumbles and a recession results.
Was there already a recession?
No. During the pandemic, households amassed about $2.5 trillion in excess savings from hunkering down at home and trillions of dollars in federal stimulus checks aimed at keeping workers afloat through layoffs and business closures.
As a result, Americans have a big cushion of savings to help them weather high inflation and interest rates. They’ve whittled down much of those excess reserves but about $1.5 trillion still remains, according to Moody’s Analytics.
Consumers also still have lots of pent-up demand to travel, go to ballgames and dine out now that the health crisis has receded. So while consumption has flagged, rising just 1% annualized at the end of last year, it bounced back and grew 3.8% in the first quarter.
Also, both households and businesses have historically low debt levels, Moody’s says, and so they’re not burdened by high monthly debt service payments.
Back in a bull market: As stocks pass a key milestone, here’s what you should know
Are we in a recession right now?
The vast majority of top economists say no. Housing has been in the doldrums, with home prices starting to decline, because of high mortgage rates. And manufacturing activity has contracted for seven straight months, also in part because of high rates that have dampened business capital spending.
But consumer spending, which makes up about 70% of GDP, has been surprisingly healthy, jumping 0.5% in April after adjusting for inflation.
As a result, the most critical economic indicator- employment – has stayed strong, with the public and private sector adding an average of 283,000 jobs a month from March through May. Also, longstanding labor shortages have led many businesses to hold onto workers instead of laying them off despite faltering sales.
All told the economy has lost some steam but it’s not shrinking. GDP grew at a 1.3% annual rate in the first quarter. And it’s projected to grow 1% in the current quarter, according to S&P Global Market Intelligence.
Will there be a recession in 2023?
Most economists still expect a recession in the second half of the year. They say the Fed’s high interest rates eventually will be felt more profoundly by consumers and businesses. At the same time, banks are pulling back lending because of deposit runs that led to the collapse of several regional banks early this year.
Perhaps the most reliable indicator of a coming recession is an inverted yield curve. Normally, interest rates are higher for longer-term bonds than shorter-term ones because investors need to be rewarded for risking their money for a longer period.
But the yield on the 2-year Treasury bond has been well above the 10-year Treasury for months. That’s been a consistent signal of recession because investors move money into safer longer-term assets – pushing their prices up and their yields down – when the economic outlook grows dimmer.
US and Allies Condemn Economic Coercion With Attention on China
(Bloomberg) — The US and five major allies condemned economic coercion and non-market policies regarding trade and investment in a joint declaration that didn’t cite China by name but clearly had Beijing in mind.
The six countries expressed concern about practices that they say “undermine the functioning of and confidence in the rules-based multilateral trading system.”
The message from the US, Australia, Canada, Japan, New Zealand and the UK carries no economic consequences and mirrors one released by Group of Seven nations after a meeting of leaders last month.
A US Trade Representative official, speaking to reporters on condition of anonymity before the statement’s release, said China has been the biggest perpetrator of the behavior condemned in the declaration.
The official mentioned China’s decision to cut off trade with Lithuania in 2021 after that Baltic nation allowed Taiwan to establish a diplomatic office there as an example of the kind of economic coercion that the declaration singles out.
Read More: G-7 Eyes China With New Joint Effort Against Economic Coercion
In response to a reporter’s question, the official rejected any comparison to the US, which has become one of the most prolific purveyors of measures that could be seen as economic coercion, chiefly through financial sanctions and limits on technology exports to countries including China.
US sanctions occurred in accordance with US laws and procedures, and in light of relevant rules and norms, the official said. The declaration makes explicit that it didn’t apply to actions that have “a legitimate public policy objective.”
“These legitimate public policy measures include: health and safety regulations, environmental regulations, trade remedies, national security measures and sanctions, and measures to protect the integrity and stability of financial systems and financial institutions from abuse,” according to the declaration.
Euro zone economy slips into technical recession after German revision
The euro zone economy was in technical recession in the first three months of 2023, data from European statistics agency Eurostat showed on Thursday, after downward revisions of growth in both the first quarter and the final quarter of 2022.
Euro zone gross domestic product (GDP) fell by 0.1 per cent in the first quarter compared with the fourth of 2022 and was 1.0 per cent up from a year earlier, Eurostat said in a statement.
That compared with flash estimates of growth of 0.1 per cent and 1.3 per cent published on May 16. Economists polled by Reuters had forecast on average respectively zero and 1.2 per cent expansion.
The revision was principally due to a second estimate from Germany’s statistics office showing that the euro zone’s largest economy was in recession in early 2023.
The euro zone figure for the fourth quarter of 2022 was also cut to –0.1 per cent from a previous reading of zero. The revisions confirmed that the euro zone was also in a technical recession.
This had been expected towards the end of last year as the euro zone wrestled with high energy and food prices and rising interest rates designed to curb inflation, but initial estimates had suggested the region had avoided this.
Along with Germany, GDP also declined quarter-on-quarter in Greece, Ireland, Lithuania, Malta and the Netherlands.
Eurostat said that household spending stripped 0.1 percentage points, public expenditure 0.3 points and inventory changes 0.4 points from quarterly GDP. Gross fixed capital formation added 0.1 points and while net trade a further 0.7 points as imports declined.
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