The Bank of Canada’s latest Business Outlook Survey indicates that business and consumer sentiment remained subdued throughout the third quarter of the year. This ongoing pessimism is primarily attributed to sustained high interest rates coupled with elevated costs, significantly impacting economic activity. The survey revealed a consistent reluctance among businesses and consumers to anticipate substantial improvements in the near term.
Business Outlook: Persistent Concerns
The Business Outlook Survey highlighted that firms continued to express concerns regarding the impact of high interest rates on sales performance. Specifically, discretionary consumer spending was identified as a major area of weakness, with many businesses noting a continued downward pressure on sales. Approximately half of the surveyed firms indicated that high interest rates were a significant factor weighing on their sales figures over the past year. Beyond interest rates, companies cited a range of factors contributing to uncertainty, including domestic and global economic instability, as well as the effects of prevailing taxes and regulations. Despite these continuing headwinds, there was a slight uptick in the proportion of businesses expecting improved sales over the next year compared to the previous year’s survey. However, this positive shift was modest.
Consumer Sentiment: Moderated Pessimism
Consumer sentiment, while still cautious, showed signs of moderation when compared to the previous quarter. A notable development was an improvement in consumers’ assessment of their personal financial situations, with 44 percent reporting that interest rates were decreasing – a key factor influencing their outlook. Despite this improvement, a substantial portion of consumers remain wary about future spending. Nearly half (49 percent) still anticipate increasing spending on essential purchases in the year ahead, while reducing their expenditure on non-essential or discretionary items. This reflects a fundamental concern regarding job security, as evidenced by the statement from one survey respondent: “You don’t want to make as many of those big purchases just because you don’t know how secure your job is. Just saving more, less spending.”
Recession Expectations and Inflation Views
A significant number of businesses – approximately 16 percent – continue to anticipate a recession within the next year, a sentiment largely unchanged from the prior quarter’s 20 percent. This indicates a persistent lack of confidence regarding the overall economic trajectory. Regarding inflation expectations, nearly two-thirds of businesses believe that inflation will remain within the two to three percent range over the next two years. Consumer expectations align with this view, anticipating inflation at approximately three percent during the same period. The survey indicated that more businesses now foresee interest rates declining further over the coming year, compared to the previous quarter’s findings.
Investment Intentions Remain Below Historical Norms
Business investment intentions remain below their historical average. Companies are primarily focused on replacing or repairing existing equipment, rather than undertaking major expansions or investments aimed at boosting production or enhancing efficiencies. Survey responses revealed that corporate investment decisions are being deferred until clearer signals emerge regarding stronger demand, reduced economic uncertainty, or lower financing costs. The survey underscores the cautious approach businesses are taking in light of the prevailing economic conditions.