(Bloomberg) -- The Bank of Canada’s business and consumer surveys showed inflation expectations normalizing and few firms planning to hire or invest in the face of weak demand.
The central bank’s business outlook indicator rose slightly to minus 2.3 in the third quarter, from minus 2.9 previously. Firms’ outlook for future sales also improved as fewer saw their orders, advanced bookings and sales inquiries decrease.
“Demand is weak, firms have excess capacity, and price growth continues to weigh on the economy,” the bank said Friday in its quarterly release of the business outlook survey.
Investment and hiring intentions remain soft, the central bank said, with plans for outlays over the next year below typical levels. Firms say their planned expenditures are focused on replacing existing capital rather than expanding productive capacity or improving efficiencies.
Businesses’ inflation expectations also continue to normalize, with over 70% seeing yearly price pressures somewhere in the 1% to 3% target range of the central bank over the next two years, the highest proportion since the first quarter of 2021.
The survey data confirm a soft but slowly improving outlook for business optimism in Canada, consistent with an economy weakened by higher interest rates and pointing to continuous excess capacity that’s likely to add to disinflationary pressures.
Cooling inflation and wage expectations mean “the bank can feel comfortable focusing on reducing policy restrictiveness,” Shelly Kaushik, an economist with the Bank of Montreal, wrote in a report to investors. “These reports continue to lean dovish, keeping the door open for a 50 basis-point cut,” she said.
Labor shortages remain well below the historic average, with just 18% of firms saying a lack of available workers is restricting their ability to meet demand. Still, firms on balance say that the intensity of labor shortages is falling. Businesses’ outlook for wage growth remains muted.
Firms cited economic growth, US and Canada elections, cost pressures, tax policy and regulation among the top issues they’re worried about and that are causing uncertainty.
The Bank of Canada has cut interest rates by a quarter percentage point at its last three decisions, bringing the overnight interest rate to 4.25%.
Markets and economists expect the central bank to continue cutting borrowing costs as the economy continues to weaken. The business outlook survey was conducted in August, before the bank cut interest rates for a third consecutive meeting in September.
In a separate survey, the bank said consumers’ expectations of inflation also continued to fall, with some measures returning to pre-pandemic levels. Wage growth expectations also fell for the first time since the second quarter of 2023.
--With assistance from Jay Zhao-Murray.
(Adds economist reaction in paragraph seven.)
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