Bank of Canada Business Outlook Survey and Canadian Survey of Consumer Expectations (2024 Q2)

Business and consumer sentiment remained downbeat in the second quarter

• According to the Bank of Canada Business Outlook Survey (BOS), Canadian business sentiment remained unchanged and somewhat downbeat in the second quarter of 2024. The BOS indicator, a statistical summary of survey results, was -2.90 in 2024 Q2 (vs. -2.39% in 2024 Q1). 
• Meanwhile, the share of firms preparing for a potential recession in the coming year declined to 20% (from 27%) with uncertainty around domestic factors, such as weaker demand, economic performance, cost and tax policy outweighing concerns about labour shortages and supply chains. 
• Firms’ indicators of future sales remained weak relative to its historical average and suggests that economic growth will remain sluggish. Expectations of weak demand are especially notable when observed through the lens of firms whose sales are tied to discretionary spending – roughly one-third of firms in this category expect sales to decline in the next 12 months. In contrast, firms whose sales depend on consumers’ essential spending and residential real estate expect higher sales alongside still strong population growth and lower interest rates. 
• Weak consumer demand and strong immigration are contributing to continuous easing in the labour market conditions, driving lower expectations for wage growth. In turn, slowing wage pressures combined with increased competition driven by weak demand continue to limit firms' plans for abnormal price increases, helping to normalize pricing behavior. This should support disinflationary pressures, keeping inflation expectations inside the Bank’s inflation-control range. 
• According to the parallel Canadian Survey of Consumer Expectations (CSCE), consumers' sentiment also remained subdued and broadly unchanged from the previous quarter. 
• The two major drivers of pessimism remain high inflation and high interest rates. As in the previous survey, households are planning to reduce or postpone purchases, with the share of consumers expecting to cut spending and save more remaining near survey-high levels.
• While consumers' perception of current inflation remained high, expectations for inflation one year ahead showed a sizeable improvement from 4.9% to 4.1%. As noted by the Bank of Canada, consumer perceptions of inflation continue to be higher than actual consumer price index inflation, with consumers citing high government spending and elevated housing costs as major causes of high inflation. Meanwhile, longer-term (2- and 5- year) inflation remained mainly unchanged and well-anchored.      

Key Implications

• Both business and consumers remain pessimistic about future economic prospects. The good news is that businesses are expecting some easing in wage and price pressures, while consumers are also adjusting their near-term inflation expectations. Nevertheless, households continue to be concerned about elevated prices and high interest costs, and are planning to reduce spending in the coming year. Weaker consumer demand remains widespread and is acutely felt by businesses, which are increasingly affected by competitive market pressures.
• The overall tone of the surveys released a week before the Bank of Canada's next monetary policy decision, builds a solid case for another rate cut. In the absence of Q2 data from the National Income and Expenditure Accounts, the collective signals from indicators point to easing inflation expectations, moderating wage pressures and a softening economic backdrop. Should June's CPI data (released on Tuesday) indicate an easing of inflationary pressures, the Bank of Canada will have more reason for another rate cut. Markets are currently attaching at 78% probability to a July rate cut.  

Disclaimer

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.