Economic Stability on the Horizon, But Trade Uncertainty Looms
The latest survey from the Bank of Canada paints a picture of an economy slowly regaining its footing, driven by lower interest rates and slower inflation. The business outlook indicator has risen to minus 1.2, marking the third consecutive quarterly improvement and reaching its highest level since early 2023.
Emerging Optimism and Tangible Improvements
Firms are beginning to anticipate improvements in sales activity, expecting their sales growth to improve over the coming year. Additionally, intentions to increase investment have become more widespread, with some businesses resuming plans that were previously postponed due to high financing costs.
Lower Interest Rates and Improving Demand
The survey suggests that lower interest rates and improving demand outlooks are driving this emerging optimism. However, the looming threat of US President Donald Trump’s trade policies may potentially destabilize the economy.
Trade Uncertainty Weighs on Businesses
Trump’s election has prompted some firms to expect higher input costs and selling prices, as well as lower capital expenditures, employment, and domestic and export sales. The full extent of Trump’s 25% tariff threat against Canada and Mexico may not have been captured in the survey, which was conducted from November 7 to 27.
Consumer Spending Decisions
Many Canadians remain uncertain about the economy, citing high prices for housing and goods and services as major concerns. Despite this, consumers expect their spending to increase faster than prices will rise for the first time since 2021. However, nearly half of consumers believe a recession is likely in the coming year.
Labor Market Concerns
Both consumers and businesses see a weak labor market, with consumers’ reported probability of losing their job rising compared to the previous quarter. Most businesses report some spare capacity, and their hiring plans remain modest.
Inflation Expectations
Consumers’ inflation expectations are largely back to pre-pandemic levels, while firms expect growth in costs to continue to ease and growth in selling prices to stabilize. More than half of firms expect inflation to be between 2% and 3% over the next two years.
Monetary Policy Outlook
The Bank of Canada will set interest rates again on January 29. With the benchmark overnight rate currently at 3.25%, policymakers have signaled a gradual pace of reductions after aggressively cutting borrowing costs since June.
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