The latest business outlook survey conducted by the Bank of Canada (BoC) reveals a nuanced picture of business confidence in the country. The survey period ran from May 8-28. This signals that while optimism on the economy has noticeably improved over the last few months, Americans continue to harbor significant doubts about the economy. Right now, one-in-four firms anticipate a recession in Canada. Although this is a drop from 32 percent last quarter, it is still much higher than the 15 percent we’ve seen over the last two quarters.
The Canadian Survey of Consumer Expectations was conducted from April 24 to May 15, with follow-up interviews from May 20 to May 26. Taken together, the results paint a picture of a nervous consumer mood. This indicates that despite signs of an economic recovery, core fears about the economic environment still remain.
Evolving Business Sentiment
Though there was a slight uptick in expectations for businesses, the report highlights that sentiment is still quite low. And now we hear from quite a few companies sounding an alarm about their sales prospects. Their pessimism comes largely from concerns about the broader effects of a weakening economy. Recent monthly surveys indicate notable, if partial, recovery from those dark times. Yet for exporters subject to U.S. tariffs, their expectations for the next few months remain grim.
Only a third of businesses anticipate paying more in tariff costs this quarter, a sharp drop from nearly two-thirds last quarter. This survey period occurred before the U.S. government announced that it would be doubling steel and aluminum tariffs to 50 percent beginning in June. This additional move, if adopted, would only make life harder for Canadian businesses.
“Tariffs and trade tensions continue to weigh on the outlooks of many firms. In some cases, the negative effects on costs and sales that most businesses predicted last quarter have materialized, and firms expect them to persist,” – The report.
Concerns about the immediate effects of tariffs on Canadian companies have eased somewhat. Now other worries are emerging over how these tariffs could affect global demand, not to mention the booming economic conditions within Canada itself.
Consumer Sentiment Remains Cautious
The consumer survey seems like a promising counterpoint to business sentiment. Yet while consumers indicate that their short-term inflation expectations have stabilized after a sharp jump early in the first quarter, their behavior tells a different story.
“The trade conflict is leading consumers to become increasingly cautious about their spending plans and to change their spending behaviour,” – The consumer survey.
As a result, consumers expect used and new motor vehicle prices to increase sharply during the coming 12 months. Good news is that their inflation expectations on core goods and services have dropped this quarter. This change could be a sign that consumers are becoming more cautious in their spending as they continue to face a volatile economic climate.
Even more consumers have answered tariffs as the worst long-term culprit for undermining the Bank of Canada’s efforts to tame inflation. This tightrope-walking sentiment makes an already complicated economic landscape all the more difficult for policymakers.
“More consumers cited tariffs as the most important factor affecting the Bank of Canada’s ability to control inflation,” – The report.
Central Bank Response and Future Outlook
The Bank of Canada opted to maintain its target for the overnight rate at 2.75 percent. This is a significant decision as made during both its April and June meetings. This decision should be a reminder that business sentiment is still very low. We have experienced marked increases since the deep drops in March and April.
Royce Mendes, an economist at Desjardins, notes that concerns regarding tariff passthrough and inflation expectations were pivotal in influencing the Bank’s decision to maintain rates. He emphasizes that these issues seem to be a little more urgent as demonstrated by the recent surveys.
“Worries about tariff passthrough and inflation expectations were the reasons that the Bank of Canada held rates back in June, but those look less concerning in these surveys,” – Royce Mendes.
Mendes doesn’t think central bankers will pivot to monetary easing anytime soon. If economic stagnation persists, there’s an opportunity for the Fed to lower rates down the line, starting as early as this summer.
Tariff-induced global supply chain challenges combined with more cautious consumer behavior lead to uncertainty for firms. In order to grow, they need to be strategic in how they control costs. As Katherine Judge points out, many businesses are unable to raise their prices due to soft consumer demand. Consequently, firms lose out on the opportunity to recover these costs from their profit margins.
