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Recession expectations widespread, outlook for inflation remains high, Bank of Canada surveys show

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The Bank of Canada published a pair of quarterly surveys on Monday showing a sharp drop in business and consumer confidence about the economy as interest rates rise.Sean Kilpatrick/The Canadian Press

The majority of businesses and consumers expect that Canada will enter a recession in the next year, while most continue to believe inflation will remain elevated for several years – a challenging mix for the Bank of Canada that sets the stage for another large interest rate hike next week.

The Bank of Canada published a pair of quarterly surveys on Monday showing a sharp drop in business and consumer confidence about the economy as interest rates rise, hitting the housing market and reducing consumer spending power.

Both businesses and consumers said they expect inflation to remain high in the coming years. There were, however, some positive signs that conditions that are forcing price increases are easing for businesses, which suggest Canada is so far avoiding the worst-case scenario of a wage-price spiral.

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The business outlook indicator, which captures how companies feel about future sales, investment and hiring, had its biggest quarterly drop since the early months of the COVID-19 pandemic. Companies connected with the housing sector were particularly downbeat. The survey of about 100 companies was conducted from mid-August to mid-September.

Also read: Canadian dollar gains as investors look to central bank survey for inflation clues

Ian McGugan: Are we on the brink of another financial crisis?

The consumer survey, conducted in mid-August, found that most respondents don’t think their wages will keep pace with inflation, and many have begun cutting back on spending. Nearly 80 per cent said the chance of a recession in Canada within the next year is at least 50 per cent.

The crucial metric for the Bank of Canada in both surveys is inflation expectations. What consumers and businesses believe about future price increases can affect the trajectory of inflation, as employees negotiate higher wages and companies raise prices to protect their profit margins. The central bank is worried that people will expect permanently high inflation, and price increases will become self-reinforcing.

The surveys show that inflation expectations remain high for both businesses and consumers. But there were some glimmers of hope, which could influence whether the Bank of Canada opts to increase interest rates 0.5 percentage points or 0.75 percentage points at its next decision on Oct. 26.

The average respondent to the business survey expects 4.26-per-cent inflation in two years time. That’s down slightly from July, but still far above the Bank of Canada’s 2-per-cent target. However, many firms said they expect key inflationary pressures to ease.

“For the first time in the past five quarters, businesses reported that their supply chains had improved compared with three months ago,” the Bank of Canada said. “Several firms – more than in recent quarters – noted an easing in labour market tightness. They described seeing a decline in competition for labour, including less poaching, compared with 12 months ago.”

Notably, companies said they expected to increase wages by an average of 4.9 per cent over the next year, down from 5.8 per cent in the previous quarterly survey. While this decline is not good news for workers whose wages aren’t keeping up with inflation, it will be received positively by the Bank of Canada, which is worried that the growth of wages will keep pushing up prices, particularly in the service sector.

“Businesses might be starting to tell the Bank of Canada what it wants to hear,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients. “While the balance of opinion among firms still pointed to labour shortages remaining a widespread issue, the intensity of those shortages has eased.”

The picture was less positive in the consumer survey. Short- and medium-term expectations of inflation continued to march higher, with the median respondent saying that inflation would be 7.1 per cent one year out, and 5.2 per cent two years out. In five years, they expected inflation to be 3.4 per cent, down slightly from the last survey.

While most consumers surveyed understand what the Bank of Canada is trying to achieve by increasing borrowing costs, the number of people who expect these actions to work declined, the central bank said.

“Canadians who aren’t familiar with the BoC’s inflation targeting think the target is upwards of 5 per cent, while even those who are familiar believe the target is close to 3 per cent,” Benjamin Reitzes, Bank of Montreal’s head of Canadian rates strategy, said in a note to clients. “If you’re looking for a reason for the BoC to remain very hawkish with its rhetoric, look no further.”

Consumer price index inflation has fallen in recent months, hitting 7 per cent in August from a four-decade high of 8.1 per cent in June. Statistics Canada will report September inflation data on Wednesday, which will tee up the Bank of Canada’s rate decision the next week.

Bank of Canada Governor Tiff Macklem has said several times in recent weeks that he expects to announce another rate hike. Royal Bank of Canada economist Claire Fan said that Monday’s reports are unlikely to change that path.

“Despite improving signs in today’s survey results, price pressures currently are still too high and broad to reverse quickly. And we don’t expect the Bank of Canada to ease off the monetary policy brakes until policymakers are confident that inflation will slow substantially and sustainably,” she wrote in a note to clients.

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Bank of Canada policy will ‘hit home’ in 2023: David Rosenberg

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The Bank of Canada may be signalling a possible end to its months-long aggressive interest-rate hike cycle, but economist David Rosenberg said next year will see the lagging impact of 2022’s monetary policy “hit home” for Canadians.

“Next year is the payback,” Rosenberg, chief economist and strategist at Rosenberg Research and Associates Inc., said in an interview with BNN Bloomberg.

“2022 was the year of the sharp run-up in rates, 2023 will be the year where the policy lags from those rising rates hit home.”

He made the comments Thursday, a day after the Bank of Canada raised its overnight lending rate by 50 basis points to 4.25 per cent, as the central bank continued with its approach to bringing down inflation.

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Rosenberg predicted a “severe recession” for Canada next year based on the rate hike cycle, calling for a “triple whammy” with economic impacts compounded by high levels of household debt, a housing bubble and ripples in the global economy.

Possible spillover effects from the interest rate cycle could be felt, Rosenberg said, as banks may constrain the availability of credit and spending drops across various sectors.

Based on the latest rate increase, Rosenberg said he predicts at potentially one more rate hike from the bank before a pause. Once inflation starts to come down, Rosenberg said he thinks the central bank may start to cut rates, possibly in the second half of 2023.

“The next stage is going to be waiting for the inflation to come down, which I think it will, and the recession is going to catch a lot of people by surprise,” he said.

A similar pattern may play out in the U.S., but Rosenberg said Canadians are more exposed to higher interest rates through variable-rate mortgages and because more consumer credit is tied to short-term interest rates.

“As bad as it’s going to be in the U.S., and believe me, it’s not going to be a pretty picture there, I think the Canadian situation in the next year is going to be clouded at best,” he said.

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CRTC rejects Telus’ request to charge credit card processing fee for some services

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The Canadian Radio-television and Telecommunications Commission ruled Thursday that Telus is not able to charge a credit card processing fee for regulated home telephone services.

This ruling applies to Alberta and B.C. services that are regulated by the CRTC, which are generally home telephone services in certain smaller communities.

Since Oct. 6, most Canadian businesses, except in Quebec, can charge their customers a fee for credit card transactions, following a class-action lawsuit filed by retailers against Visa, MasterCard and card-issuing banks.

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Quebec is not included in this decision due to the province’s Consumer Protection Act, which prohibits the application of such surcharges.

On Aug. 8, Telus filed an application with the CRTC to introduce a credit card processing fee of 1.5 per cent, plus taxes, for payments made with a credit card.

On. Oct. 17, Telus began to charge the fee to clients paying by credit card in areas where services are not regulated by the CRTC, which includes its wireless and internet customers outside of Quebec.

Telus does not need to ask for the CRTC’s approval to add the surcharge to its unregulated services but the organization said it is “very concerned” about this practice as it goes against affordability and consumer interest.

“We heard Canadians loud and clear: close to 4,000 of you told us that you should not be subjected to an additional fee based on the method you choose to pay your bill,” Ian Scott, chairperson and CEO of the CRTC, said in a statement. “We expect the telecommunications industry to treat Canadians with respect and do better.”

The CRTC said, with this ruling, it is sending a “clear message” to Telus and other telecommunications service providers that are thinking of imposing a fee like this one on their customers.

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Stock market news live updates: Stocks close mostly lower as selling pressure continues

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U.S. stocks extended this week’s downtrend Wednesday to close a choppy session with losses as the prospect of sustained higher rates and slowing growth continued to plague investor sentiment.

The S&P 500 (^GSPC) slumped 0.2%, ending a fifth straight day lower, while the Dow Jones Industrial Average (^DJI) capped trading at the flatline. The technology-heavy Nasdaq Composite (^IXIC) declined 0.5%.

In commodities markets, oil extended losses to close around $72 per barrel after a decline of roughly 10% this week to the lowest level since January.

“Fears are growing that economies are in for a rough time ahead as feverish inflation and the bitter interest rate medicine being used to bring it down take effect,” Hargreaves Lansdown senior investment and markets analyst Susannah Streeter said in a morning note, pointing also to recession warnings from U.S. bank bosses and gloomy trade data in China. “Despite today’s easing of restrictions, it’s clear China’s Covid nightmare is not at an end.”

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A chorus of downbeat remarks from Wall Street leaders on Tuesday further weighed on already slumping sentiment this week as many expressed concerns over the toll of inflation and elevated interest rates on U.S. consumers.

JPMorgan Chief Executive Officer Jamie Dimon said the $1.5 trillion in excess savings across Americans’ bank accounts were being eroded by rising prices, while warning the dwindling disposable cash may “derail the economy and cause this mild or hard recession that people are worried about.” Bank of America chief Brian Moynihan echoed a similar message, indicating that while consumers are still spending money, the pace is beginning to slow.

Meanwhile, Goldman Sachs (GS) CEO David Solomon projected stocks will barrel lower in 2023 and placed the probability of a soft landing at a mere 35% – a view at odds with in-house economists at his investment bank, who anticipate in their baseline forecast that the U.S. will narrowly avoid a recession next year.

“There’s a very reasonable possibility that we could have a recession of some kind,” Solomon said in an interview at the Wall Street Journal’s CEO Council Summit Wednesday afternoon.

David Solomon, Chief Executive Officer of Goldman Sachs, speaks during the Global Financial Leaders Investment Summit in Hong Kong, China November 2, 2022. REUTERS/Tyrone SiuDavid Solomon, Chief Executive Officer of Goldman Sachs, speaks during the Global Financial Leaders Investment Summit in Hong Kong, China November 2, 2022. REUTERS/Tyrone Siu
David Solomon, Chief Executive Officer of Goldman Sachs, speaks during the Global Financial Leaders Investment Summit in Hong Kong, China November 2, 2022. REUTERS/Tyrone Siu

Reports that China’s government will scale back some zero-COVID rules appeared to underwhelm investors weighing easing restrictions against economic data out of the nation that showed falling imports and exports in November.

Back in the U.S., shares of Campbell Soup (CPB) rose nearly 6% after the canned goods producer reported earnings that beat Wall Street estimate and raised its full-year forecast. The company said sales of soup in the U.S. jumped 11% due to increases in demand for ready-to-serve soups, condensed soups and broth, reflecting a recent shift among consumers to value food purchases as inflation continues to weigh on households.

Shares of Apple (AAPL) sank 1.4%, one day after Bloomberg News reported the iPhone-maker scaled back ambitious self-driving plans for its future electric vehicle and postponed the car’s release data to 2026. Bloomberg also reported Wednesday morning that mobile industry bellwether Murata Manufacturing expects Apple will further reduce production plans for its iPhone 14 due to weakening demand.

Online used car retailer Carvana (CVNA) was also in the spotlight after plunging about 43% after the company’s biggest creditors reportedly signed an agreement to cooperate in potential restructuring negotiations as the company faces growing bankruptcy risk.

Investors await another round of economic data as the Federal Reserve’s final rate-setting meeting this year approaches. Readings on weekly jobless claims, producer price inflation, and consumer sentiment are due out later this week, but the most important data point for clues on the Fed’s direction for interest rates is the Consumer Price Index (CPI) out Tuesday, the same day U.S. central bank officials kick off their last two-day rate-setting meeting of 2022.

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