The Bank of Canada’s Business Outlook Survey for the third quarter of 2024 indicates continued weak demand and slowing inflationary pressures for Canadian businesses. The survey, conducted between August 8 and 30, 2024, shows that firms are still grappling with soft sales, high interest rates, and economic uncertainty, despite recent cuts to interest rates. Business leaders remain cautious in their outlook, but there are signs of slight improvement compared to previous quarters.
Sales growth remains below average, primarily due to the lingering effects of inflation and elevated interest rates, which have constrained consumer spending. Firms that rely on discretionary consumer purchases have been hit hardest, as customers are seeking cheaper alternatives or requiring discounts. However, sales expectations have improved slightly, with some optimism fueled by the anticipation of further interest rate reductions.
Capacity pressures have eased, with fewer businesses reporting challenges like labour shortages or supply chain issues. While some structural labour shortages persist, particularly in specific occupations or remote areas, most firms reported an improved ability to find workers when needed. High immigration levels have helped increase the labour supply, further reducing hiring pressures. Consequently, investment and hiring plans remain modest, with many businesses focusing on maintaining current operations rather than expanding. Firms noted that they are waiting for clearer signs of stronger demand and lower financing costs before committing to significant investments.
Firms also anticipate slower growth in wages and input prices over the next year. While wage growth is still driven by cost-of-living adjustments, including union negotiations, the intensity of this pressure is expected to ease. Similarly, businesses foresee weaker price growth for both commodity and non-commodity goods, primarily due to soft demand and increased competition. Price hikes from earlier wage increases are having less of an impact on firms’ pricing decisions compared to last quarter.
Inflation expectations have moderated, with businesses predicting inflation to average around 2.5% in the near term. Two-thirds of firms expect inflation to fall within the 2% to 3% range over the next two years, with many anticipating that inflation will return to 2% within 12 months. Businesses attributed their lower inflation expectations to tight monetary policy, despite the recent interest rate cuts, as well as ongoing weakness in demand.
Overall, business conditions remain subdued but stable, with firms continuing to navigate challenges posed by soft demand, elevated costs, and economic uncertainty. While there is some optimism about the future due to interest rate cuts, businesses are exercising caution in their investment and hiring plans as they wait for clearer signs of recovery.