Bank of Canada survey finds fewer businesses expect a recession

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Canadian businesses faced continued weak demand in the first quarter but there are signs of returning optimism as many firms expect interest rates to come down over the next 12 months, according to the Bank of Canada’s latest business outlook survey.

In addition, indicators of business conditions, sales outlooks and employment intentions have changed direction after many quarters of decline, with expectations for improved sales supported not only by interest rate expectations but by population growth and efforts to enter new markets or develop new products, according to the report, which was published Monday.

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The uptick in sentiment, with firms reporting that business conditions improved slightly in the first quarter, follows nearly two years of deterioration, according to the report, and the improvement was widely reported across nearly all regions, sectors and firm sizes. In addition, fewer businesses are planning for a recession in Canada over the next 12 months than in the previous survey at the end of 2023.

Among businesses anticipating that sales growth will improve in the next year, about half pointed to their expectations that interest rates will decline. And the share of firms expecting costs and selling prices to increase significantly have declined markedly from their peaks in 2022, with businesses planning smaller price increases than over the past 12 months.

While the share of firms planning unusually large or frequent price increases is steadily declining, a “shrinking minority” say there are factors keeping them from returning to normal pricing behaviour. These include wage growth above pre-pandemic norms, profit margins that have yet to fully recover, and incomplete pass-through of higher costs from previous years.

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Wage growth remains high compared to levels before the COVID-19 pandemic, but many businesses in the latest survey reported that they are finding it easier to fill job vacancies and most expect wage growth to slow as what workers earn catches up with cost-of-living increases.

Slightly more than 40 per cent of businesses — a similar proportion to last quarter of 2023 — indicated their wage increases are no longer abnormally high. However, the share of businesses expecting abnormally high wage growth to persist through 2025 has increased to 23 per cent from 14 per cent in the previous quarter.

“Businesses’ pricing behaviour is continuing to normalize,” said the report, which is a summary of interviews conducted by the Bank of Canada with business leaders from about 100 firms selected in accordance with the composition of Canada’s gross domestic product. “But the slow moderation in wage growth and the gradual pass-through of high costs are keeping output price growth elevated.”

Still, the latest business outlook survey shows inflation expectations are coming down in the business community, with 27 per cent of firms expecting inflation to remain above two per cent beyond three years, compared to 37 per cent in the fourth-quarter 2023 survey.

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Many businesses moderated investment plans in response to high borrowing costs and persistently weak demand and focused their investment efforts on maintaining existing capacity, according to the report.

“Part of the moderation in investment intentions can be attributed to the long-lasting impacts of past interest rate increases, as long-term projects that were financed when interest rates were lower are completed,” the report said. “Instead of starting new projects to boost productivity or expand output, many firms are focusing their investment plans on simply repairing or replacing machinery and equipment to maintain their current capacity.”

Still, firms are no longer reporting tightening credit conditions, with three quarter of businesses that indicated this trend citing lower borrowing costs resulting from the decline in long-term bond yields in recent months.

The Bank of Canada’s first-quarter business outlook survey was conducted by phone, video conference and in-person interviews from Feb. 5 to Feb. 23, 2024.

• Email: bshecter@postmedia.com

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