By Steve Scherer and David Ljunggren
OTTAWA (Reuters) -Canadian firms say their order books declined as interest rates crimped consumer spending, and they see inflation easing despite increased concerns over wages for the next year, the central bank said on Monday in a quarterly survey.
Some 38% of businesses expect a recession over the next year, according to the survey, which was conducted by the Bank of Canada (BoC) at the end of the fourth quarter. That was up from a third in the previous survey. Sixty-one percent of consumers expected a recession, compared with 55% in the previous survey.
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 in the previous quarter. Still, many businesses see sales volumes increasing over the next 12 months.
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.
"Overall, businesses and consumers are feeling the pain of higher interest rates and are responding accordingly," said Royce Mendes, head of macro strategy at Desjardins Group. "Consumers are curtailing spending and businesses, seeing falling sales, are tapping the brakes on hiring."
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.
The Canadian central bank raised its key policy rate to a 22-year high of 5% last year and has left it at that level since July. Annual inflation was 3.1% in November, down from a 2022 peak of more than 8%, but has remained above the BoC's 2% target since March 2021.
The central bank's next interest rate announcement is on Jan. 24, when it is expected to keep its key policy rate on hold. Money markets and economists expect it to start cutting rates in the first half of 2024.
"Firms' pricing behavior 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.
ABOVE-TARGET INFLATION
Fifty-four percent of businesses expect inflation to run higher than 3% over the next two years, and 42% see it below 3%. Twenty-seven percent predict it will take longer than four years for inflation to return to 2%, up from 18% in the previous quarter.
The Bank of Canada had previously forecast inflation should hit 2% by the end of 2025, but Governor Tiff Macklem - making his last public appearance of 2023 - told reporters it should be closer to the 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 BoC 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.