Economic Uncertainty on the Rise
The number of firms preparing for a recession has increased during the third quarter, according to a survey released by the Bank of Canada. This increase in recession preparation will make firms hesitant to invest in hiring or growth, as indicated by the survey results. The Bank of Canada’s business outlook survey, based on interviews with 100 firms, shows that business sentiment remains subdued despite an improvement from worst-case expectations at the beginning of the year.
Weak Sales and Investment
Companies expect sales to remain weak as U.S. tariffs continue to hold back demand. The percentage of firms preparing for an economic downturn has jumped from 28 to 33 per cent. Uncertainty surrounding financial, economic, and political conditions remains the most pressing concern for firms, but fewer cited it this quarter than previous quarters. Cost pressures, slowing demand, and taxes and regulations, including duties and tariffs on international trade, also continue to weigh on firms.
Consumer Spending and Expectations
Consumers are also anticipating a recession this year, with two-thirds expecting a downturn in the next 12 months. Consumer spending intentions on durables, such as furniture and appliances, and other discretionary spending items, such as restaurant meals and vacations, remain low and unchanged from the second quarter. The top factors leading to consumers spending less include high prices for goods and services, economic uncertainty, and housing costs, such as rent and mortgage payments.
Impact on Labour Market and Inflation
The labour market added 60,000 jobs in September, but the unemployment rate held at 7.1 per cent. The Bank of Canada cut its overnight rate by 25 basis points to 2.5 per cent in September, amid evidence that U.S. tariffs were weakening the Canadian economy. Inflation expectations for the year ahead among firms sit around three per cent, with longer-term expectations remaining around 2.5 per cent. Consumers expect inflation to be four per cent in the next year, unchanged from their expectations in the second quarter.
Conclusion
The survey data reinforces the possibility of a cut by the central bank at its next decision. The Q3 business and consumer sentiment surveys highlight that the net risks continue to tilt negative, especially for the labour market. As a result, many businesses expect their selling prices to increase over the next 12 months at a similar rate as over the past 12 months. However, weak demand has limited the ability of firms to pass on costs, and fewer firms plan to raise their selling prices compared to the second quarter.
