Bank of Canada Business Outlook Survey and Canadian Survey of Consumer Expectations (2024 Q3)

Business and consumer sentiment remain subdued, rising moderately in Q3.

• According to the Bank of Canada Business Outlook Survey (BOS), Canadian business sentiment remained below its historical average though it saw a slight improvement in the third quarter of 2024. The BOS indicator, a statistical summary of survey results, was -2.33 in 2024 Q3 (vs. -2.88% in 2024 Q2).
• Businesses continue to report weak demand as consumers remain selective, opting for cheaper and discounted options. While expectations of future sales have improved slightly compared to last year, driven by firms' anticipation of lower rates, soft demand is keeping investment intentions at levels below historical average.
• Capacity and labour constraints continued to ease, primarily due to weak demand and strong immigration.  Businesses reported being appropriately staffed for their current and expected demand levels, and many expect wage growth to slow over the next 12 months. 
• Slowing wage pressures, combined with increased competition driven by weak demand, are limiting firms' plans for abnormal price hikes, which is helping to normalize pricing behavior. Only 15% of respondents expected inflation to be above 3% over the next two years.
• According to the parallel Canadian Survey of Consumer Expectations (CSCE), consumers' sentiment also remained subdued but showed some improvement compared to the previous quarter. 
• The most encouraging sign for the Bank of Canada is the significant decline in the two-year inflation expectations, which have returned to pre-pandemic levels. One-year inflation expectations and perception of current inflation, typically linked to housing, groceries and gas, eased as well, but remain higher than 2019 levels.
• Consumers are less pessimistic about their financial situation than in the previous quarter, with more homeowners feeling optimistic about mortgage renewals.
• Despite these improvements, over half of consumers still expect a recession in the coming year and do not expect further rate cuts. This continues to impact consumers' spending decisions with most households still planning to reduce or postpone purchases.
• Consumer expectations of wage growth declined for the first time since the second quarter of 2023. The survey also suggests that certain segments of the labour market, particularly younger workers, are experiencing a more pronounced deterioration in wage growth expectations, compared to other groups.      

Key Implications

• Despite ongoing concerns about future economic prospects, today’s surveys provide a glimmer of hope as sentiment showed marginal improvement. Businesses are anticipating some relief in wage and price pressures, while consumers are adjusting their near-term inflation and wage expectations downward.
• While the possibility of a jumbo 50 basis point cut remains on the table, today’s survey results and stronger-than-expected employment report suggest that a 25 basis point cut is more likely. The only data point that could shift the decision toward a larger cut would be a significant downside surprise in next Tuesday’s CPI report. Stay tuned!  

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