Bank of Canada Business Outlook Survey and Canadian Survey of Consumer Expectations (2023 Q3)

Maria Solovieva, CFA, Economist | 416-380-1195  

Date Published: October 16, 2023

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Business and consumer sentiment measures weaken in Q3

  • According to the Bank of Canada Business Outlook Survey (BOS) Canadian business sentiment continued deteriorating in the third quarter of 2023. The BOS indicator, a statistical summary of survey results, was -3.51 in 2023 Q3, down from -2.15 in 2023 Q2. This is the indicator's lowest level in over a decade, except for a brief period early in the COVID 19 pandemic.
  • Businesses were more downbeat this quarter, with the survey noting that firms are seeing a slow-down in economic activity across a broad range of indicators. Still, the share of firms planning for a recession in the coming year remained unchanged (roughly one third).
  • Firms' expectations about input and output price growth remain on a downward trend – a sigh of relief for the Bank of Canada. Likewise, inflation expectations eased further, with 39% of respondents expecting long-term inflation to be in the 2% to 3% range compared with 30% in the previous survey. 
  • Meanwhile, expectations for wage growth over the next year moved down slightly to 4.3% from 4.5% last quarter. Fewer firms reported upward pressure on wage growth from the rising cost of living or the need to attract and retain employees. Still, some firms remain uncertain about when wage growth will return to normal.
  • Results in the parallel Canadian Survey of Consumer Expectations (CSCE) showed Canadians' worsening outlook on the economy, with the rising costs of household necessities remaining the most pressing concern.
  • Consumer inflation expectations were mixed. One-year and five-year expectations continued moving down to 5.0% and 2.75%, respectively, while the two-year metric went up to 4.04% from 3.93%. Importantly, the gap between perceptions of inflation and actual inflation is unusually wide.
  • Workers still feel confident about the labour market with their expectations for wage growth now at a survey high.      

Key Implications

  • The downbeat tone of the two surveys suggests that elevated price pressures remain a top concern for businesses and households. In addition, today's survey incorporates the reaction to the two most recent interest rate hikes and shows the rising cost of financing dampened business and consumer confidence in their future prospects. More consumers expect to reduce spending, especially on big-ticket items that require financing. Meanwhile, higher rates are resulting in more businesses putting off investment spending in the next 12 months. 
  • One concern is that some businesses continue passing along the uncommonly large cost increases from earlier in the pandemic through to customers, potentially exerting upward pressure on consumer prices. On the other hand, according to the Bank's own research, the extent of the passthrough depends on the competitive pressures in the marketplace and the strength of consumer demand, both of which are becoming less favourable. Barring a significant upward surprise from the Consumer Price Index release tomorrow, we expect the Bank to stay with a policy rate of 5%, allowing past rate hikes work through the economy.