Canadian firms keep investment plans under check despite rate cut expectations
2024.07.15 10:52
By Promit Mukherjee
OTTAWA, July 15 (Reuters) – Canadian businesses expect interest rates to come down by upto 100 basis points over the next year but their investment spending remains below average owing to a weak demand outlook, the Bank of Canada said on Monday in its second-quarter survey.
Fewer firms see a mild recession in the coming 12 months compared with the previous survey, the central bank said, adding that firms’ expectation for inflation was now in the bank’s inflation-control range of 1% to 3%.
The Bank of Canada (BoC) targets 2% inflation – the mid point of the control range.
Last month, the BoC cut its key overnight rate by 25 basis points for the first time in four years after keeping them at a two-decade high for almost a year.
The cut has boosted hopes that more rate reductions are coming, with BoC Governor Tiff Macklem insisting that any future action would be data-dependent, primarily how inflation and growth evolves.
The business outlook indicator, a metric of how business prospects look like under current economic conditions, fell to -2.9% in the second quarter from -2.39% in the quarter earlier.
“Business sentiment remained relatively flat in the second quarter of 2024,” the survey said, adding that it was weighed down by elevated interest rates, weak demand and ongoing high costs.
Inflation in May accelerated after cooling for nearly five months, while GDP numbers showed that the economy expanded in April and is likely to post positive growth in May.
Some 41% of respondents thought that inflation would be above 3% for the next two years, a tick higher than the 40% in the previous quarter, while 20% of the firms expect Canada to be in recession in the next 12 months, down from 27%.
Uncertainty and cost pressures remained the most frequently mentioned concerns of businesses, the survey said.
“Firms mentioned red tape and regulations as slowing their plans, and taxes, predominantly the carbon tax, as increasing their costs,” it said.
Financial markets see a 73% chance of another 25 basis point cut at the bank’s July 24 interest rate announcement.
A weak sales outlook has softened the demand for additional workers and as a result the expectations of average wage increase in the next 12 months has declined significantly, the survey showed.
A resilient wage growth rate has been a constant irritant for the BoC, impeding the bank’s efforts to cool inflation but Macklem said last month that wages were starting to moderate.
A separate survey by the central bank on consumer expectations showed that perceptions of inflation are unchanged from a quarter ago, but their expectations for inflation over the next 12 months have declined significantly.
“Most consumers continue to report spending cuts, and pessimism about future economic condition persists,” it said.
