BoC surveys show economy softening, future inflation expectations falling

Economy

BoC surveys show economy softening, future inflation expectations falling

Published

1 year ago

April 3, 2023

Harry Miller

OTTAWA –

Businesses and consumers are expecting inflation to slow faster than they previously thought but as high interest rates weigh on the economy, they’re also adjusting their finances to account for a slowdown.

That’s according to the Bank of Canada’s first quarter business and consumer expectations surveys released Monday.

The surveys — which ask respondents what they think the annual inflation rate will be one, two and five years from now — show expectations for future inflation are falling. This comes as the actual inflation rate has been slowing for months, reaching 5.2 per cent in February after peaking at 8.1 per cent last June.

However, businesses and consumers continue to expect inflation to remain above two per cent until at least 2025.

The Bank of Canada closely monitors inflation expectations in the economy because inflation can stay high if businesses and consumers continue to expect prices to rise rapidly.

The central bank is likely encouraged to see inflation expectations falling, but the surveys show business and consumers still expect inflation to be higher than the Bank of Canada’s forecasts.

It’s currently projecting inflation to fall to about three per cent by mid-year and back down to two per cent in 2024.

The central bank aggressively raised interest rates starting in March 2022 to clamp down on rapidly rising prices. It’s currently holding its key interest rate steady at 4.5 per cent and doesn’t anticipate raising it again, so long as inflation cools fast enough.

The Bank of Canada will make its next interest rate decision on April 12. In a client note sent out Monday, TD director of economics James Orlando said the survey responses should encourage the Bank of Canada to stay on the sidelines.

With its key interest rate at the highest level since 2007, higher borrowing costs are expected to further constrain consumers and weigh on business activity in the coming months.

According to the survey, more consumers are reporting that they’re worse off as a result of higher interest rates and inflation than in the last survey, conducted in the fourth quarter of 2022.

Overall, 56.5 per cent of consumers say high inflation has made them “much worse off” or “somewhat worse off.” Meanwhile, 31.3 per cent say they’re worse off because of high interest rates.

The central bank’s surveys reveal consumers with variable-rate mortgages, Indigenous people, people with disabilities and racialized people are more likely to report being hurt by high inflation and interest rates.

With a potential recession looming, the surveys show consumers expect to pull back on spending and businesses anticipate sales will slow.

The Bank of Canada found almost half of firms have adjusted their business plans to account for a recession. And consumers are planning to spend less on activities such as travel and going to restaurants over the next year.

Orlando said the change in behaviour is a sign that the economy is in fact headed toward a slowdown.

“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,” Orlando said.

So far, the economy has been relatively resilient amid high interest rates. Statistics Canada reported earlier this week that real gross domestic product rose by 0.5 per cent in January after declining by 0.1 per cent in December. Its preliminary estimate for February suggests another increase of 0.3 per cent.

The labour market in particular has shown strength, with the economy continuing to add jobs even as recession talk bubbles.

And while labour shortages are still the second most important issue facing firms, the surveys show signs of easing in the labour market, with businesses no longer anticipating rising wages to push inflation higher.

The Bank of Canada has raised concerns over the tight labour market and rising wages fuelling inflation. Canada’s unemployment rate was hovering near record lows in February, sitting at five per cent. Meanwhile, wages were up 5.4 per cent from a year ago.

This report by The Canadian Press was first published April 3, 2023

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Economy

China Wants Everyone to Trade In Their Old Cars, Fridges to Help Save Its Economy

Published

10 hours ago

April 24, 2024

Harry Miller

China’s world-beating electric vehicle industry, at the heart of growing trade tensions with the US and Europe, is set to receive a big boost from the government’s latest effort to accelerate growth.

That’s one takeaway from what Beijing has revealed about its plan for incentives that will encourage Chinese businesses and households to adopt cleaner technologies. It’s widely expected to be one of this year’s main stimulus programs, though question-marks remain — including how much the government will spend.

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Economy

German Business Outlook Hits One-Year High as Economy Heals

Published

11 hours ago

April 24, 2024

Harry Miller

German business sentiment improved to its highest level in a year — reinforcing recent signs that Europe’s largest economy is exiting two years of struggles.

An expectations gauge by the Ifo institute rose to 89.9. in April from a revised 87.7 the previous month. That exceeds the 88.9 median forecast in a Bloomberg survey. A measure of current conditions also advanced.

“Sentiment has improved at companies in Germany,” Ifo President Clemens Fuest said. “Companies were more satisfied with their current business. Their expectations also brightened. The economy is stabilizing, especially thanks to service providers.”

A stronger global economy and the prospect of looser monetary policy in the euro zone are helping drag Germany out of the malaise that set in following Russia’s attack on Ukraine. European Central Bank President Christine Lagarde said last week that the country may have “turned the corner,” while Chancellor Olaf Scholz has also expressed optimism, citing record employment and retreating inflation.

There’s been a particular shift in the data in recent weeks, with the Bundesbank now estimating that output rose in the first quarter, having only a month ago foreseen a contraction that would have ushered in a first recession since the pandemic.

Even so, the start of the year “didn’t go great,” according to Fuest.

“What we’re seeing at the moment confirms the forecasts, which are saying that growth will be weak in Germany, but at least it won’t be negative,” he told Bloomberg Television. “So this is the stabilization we expected. It’s not a complete recovery. But at least it’s a start.”

Monthly purchasing managers’ surveys for April brought more cheer this week as Germany returned to expansion for the first time since June 2023. Weak spots remain, however — notably in industry, which is still mired in a slump that’s being offset by a surge in services activity.

“We see an improving worldwide economy,” Fuest said. “But this doesn’t seem to reach German manufacturing, which is puzzling in a way.”

Germany, which was the only Group of Seven economy to shrink last year and has been weighing on the wider region, helped private-sector output in the 20-nation euro area strengthen this month, S&P Global said.

–With assistance from Joel Rinneby, Kristian Siedenburg and Francine Lacqua.

(Updates with more comments from Fuest starting in sixth paragraph.)

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Economy

Parallel economy: How Russia is defying the West’s boycott

Published

17 hours ago

April 23, 2024

Harry Miller

When Moscow resident Zoya, 62, was planning a trip to Italy to visit her daughter last August, she saw the perfect opportunity to buy the Apple Watch she had long dreamed of owning.

Officially, Apple does not sell its products in Russia.

The California-based tech giant was one of the first companies to announce it would exit the country in response to Russian President Vladimir Putin’s full-scale invasion of Ukraine on February 24, 2022.

But the week before her trip, Zoya made a surprise discovery while browsing Yandex.Market, one of several Russian answers to Amazon, where she regularly shops.

Not only was the Apple Watch available for sale on the website, it was cheaper than in Italy.

Zoya bought the watch without a moment’s delay.

The serial code on the watch that was delivered to her home confirmed that it was manufactured by Apple in 2022 and intended for sale in the United States.

“In the store, they explained to me that these are genuine Apple products entering Russia through parallel imports,” Zoya, who asked to be only referred to by her first name, told Al Jazeera.

“I thought it was much easier to buy online than searching for a store in an unfamiliar country.”

Nearly 1,400 companies, including many of the most internationally recognisable brands, have since February 2022 announced that they would cease or dial back their operations in Russia in protest of Moscow’s military aggression against Ukraine.

But two years after the invasion, many of these companies’ products are still widely sold in Russia, in many cases in violation of Western-led sanctions, a months-long investigation by Al Jazeera has found.

Aided by the Russian government’s legalisation of parallel imports, Russian businesses have established a network of alternative supply chains to import restricted goods through third countries.

The companies that make the products have been either unwilling or unable to clamp down on these unofficial distribution networks.

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