Bank of Canada business outlook survey says “demand is weak”

To me, this report is more important than today’s jobs data.

• The Business Expectations Survey index remains negative, indicating broad-based weakness
• “Demand is weak, businesses have excess capacity, and price growth continues to slow” but there has been only slight deterioration since last quarter.
• Companies have reported weak sales growth in the past due to past inflation and interest rate increases that continue to impact the economy, especially on consumers’ budgets
• Sales expectations remain below average but improved slightly during the quarter due to hopes for interest rate cuts. Sales growth index to +13 from +1
• Labor shortages continue to ease, with a few companies reporting challenges
• Investment and employment intentions remain weak
• Investment spending +9 vs. +11 previously
• Wage growth is expected to moderate gradually
• Companies expect a slowdown in growth in input and selling prices
• Inflation expectations are within the Bank of Canada’s target range across all horizons

The Bank of Canada’s Business Outlook Survey for Q3 2024 shows Canadian companies continue to face headwinds, with the BOS index remaining in negative territory. While current business conditions remain weak, there is a glimmer of hope as future sales forecasts have shown some improvement.

Labor market pressures continue to ease, with the share of companies reporting labor shortages falling well below historical averages. This slowdown in the labor market is reflected in weak employment intentions in the coming year.

On the inflation front, companies expect wage growth to gradually moderate. They also expect growth in both input costs and selling prices to slow compared to recent quarters. Importantly, inflation expectations have stabilized within the Bank of Canada’s 2-3% target range across all time horizons, with most companies expecting inflation to be between 2% and 3% over the next two years.

Given that the CPI is already at 2%, there is no reason for Bank of Canada interest rates to be so high above neutral. The question at this month’s meeting is 25 basis points or 50 basis points and I see there is an overwhelming case for 50 basis points. However, the Bank of Canada has been slow to act, and a slight rise in future sales expectations may give the central bank pause before making any dramatic moves.