Canadian firms expect sales to slow as interest rates crimp consumer spending and they see inflation easing despite increased concerns over wages, the central bank said on Monday in a fourth quarter survey.
Some 38 per cent of businesses expect a recession over the next year, up from a third in the previous Bank of Canada survey, and 61 per cent of consumers see a recession, compared with 55 per cent previously.
Businesses reported a decline in their order books compared with a year earlier, and more firms expect wages to increase over the coming year than the previous quarter.
The business outlook indicator turned slightly more positive in the final quarter of 2023, rising to -3.15 from -3.45, as expectations for input and output prices eased.
"Firms' pricing behaviour is slowly returning to normal," the survey said. "Still, wage growth on average is expected to be higher than normal over the next 12 months, often related to cost-of-living adjustments."
In December, the average hourly wage growth for permanent employees accelerated at its fastest year-on-year pace in almost three years.
The Bank of Canada raised rates to a 22-year high of 5 per cent last year and has left them on hold since July. Inflation was 3.1 per cent in November, down from a 2022 peak of more than 8 per cent, but has remained above the bank's 2 per cent target since March 2021.
The bank's next announcement is on Jan. 24, when it is expected to keep its key policy rate on hold. Money markets and economists expect the bank to start cutting rates in the first half of 2024.
Thirty-nine percent of businesses said their sales volumes had declined over the past year. They attributed the decline to slowing growth, the impact of higher interest rates and inflation.
Fifty-four percent of businesses expect inflation to run higher than 3 per cent over the next two years, and 42 per cent see it below 3 per cent. Twenty-seven percent predict it will take longer than four years for inflation to return to 2 per cent, up from 18 per cent the previous quarter.
The Bank of Canada had previously forecast inflation should hit 2 per cent by end-2025 but Governor Tiff Macklem - making his last public appearance of 2023 - told reporters it should be closer to target by the end of this year.
"Short-term inflation expectations are slowly trending downward," the survey said. However, businesses still expect inflation to remain elevated because of wage growth and the prices of commodities, food and housing.
A separate Bank of Canada survey showed that consumers do not expect further interest-rate increases over the next year. Consumer expectations for future inflation eased, as did their perception of current inflation.
"Consumers perceive inflation to have decreased, and their expectations for price growth for some key goods such as food and gas have moderated," the consumer survey said.
(Reporting by Steve Scherer, editing by David Ljunggren and Promit Mukherjee)
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