Sentiment among Canadian firms fell the most since the beginning of the pandemic, with inflation expectations among consumers and businesses showing few signs of abating, Bank of Canada surveys show.
The central bank’s business outlook indicator fell to 1.69 in the third quarter, from 4.87 previously. While still positive, that’s the largest deterioration in the confidence of Canadian firms since the second quarter of 2020.
Bonds staged a modest rally after the release of the data, with the yield on benchmark Canadian two-year debt falling about two basis points to 4.098 per cent as of 10:43 a.m. Ottawa time. The loonie was little changed. The data highlight a rapid erosion of business conditions, brought on by a combination of a slowing economic momentum, high inflation, and the central bank’s increases to borrowing costs.
While both have similar inflation expectations and views on the probability of a recession, they diverge on wages. With firms expecting demand to slow and resisting large wage increases, consumers said their wages weren’t keeping up with inflation and believed they wouldn’t catch up, resulting in spending cuts and changes in shopping habits. Consumers also see shrinking real wages as the main trigger of a recession.
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