EconoFACTS

June 30, 2023 | 11:31

BoC Business Outlook Survey (Q2) — Good, But Good Enough?

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

The Bank of Canada's Q2 Business Outlook Survey (BOS) weakened across the board. Most sentiment metrics softened with the BOS indicator down 1.1 pts to -2.2, the lowest reading outside of the pandemic since 2016. All eyes were on inflation expectations, which continued to trend lower but remain elevated. The share of firms expecting inflation to be above 3% over the next year fell 15 ppts to a still-high 64%. One-, two- and five-year inflation expectations fell but all remain above 2%, with the near-term notably higher. In addition, the largest share of firms since the GFC expect growth in output prices to slow over the next year, while a record share expect input prices to fall. Importantly, the BOS notes: "With firms expecting wage growth to ease, they no longer anticipate that labour-related costs will add upward pressure on their output price growth over the next year."

Capacity pressure eased sharply as well, moving back into the historically "normal" range, consistent with an ongoing softening of inflation pressures and a narrowing of excess demand. Recall that the Bank of Canada's June policy statement highlighted "the evolution of excess demand" as a driver of policy.

The various activity metrics were mostly weaker:

Sales growth expectations improved 12 ppts to -6%, but that's still negative. And, the broader sales metrics weakened for a fourth straight quarter.
Investment intentions slipped 5 ppts to 14%, slightly below the lifetime average for the survey.
Hiring intentions fell 11 ppts to 34%, right in line with the long-term average.

There were some positives as well. Many firms were more upbeat on domestic demand, driven by fewer concerns about recession, improved supply chains, less interest rate uncertainty and upcoming capital projects (public and private).

In a separate release, the Bank of Canada's Survey of Consumer Expectations took a broadly similar tone. Inflation expectations continued to trend lower, but remain well above levels consistent with the BoC's 2% inflation target. Fewer Canadians are worried about recession (50% down from 58%), though mortgage holders facing renewal are expecting to cut spending. One notable shift that could irk policymakers is that home price expectations have turned higher once again. In addition, wage expectations among consumers remained elevated, though they're off the highs.

Key Takeaway: The BOS showed a clear softening in sentiment. While inflation expectations were broadly lower, they remain well above consistent with the BoC's 2% target. Nonetheless, the factors the Bank highlighted in the June statement all improved: lower inflation expectations, ebbing excess demand, easing wage pressures, and lower expected price increases. There doesn't appear to be as much urgency to hike rates again in July. Similar to the June meeting, it's going to be a close call, with next week's jobs data likely tilting the balance.

Table 1 - Bank of Canada — Business Outlook Survey

(balance of opinion : greater minus lesser : %)

Source: BMO Economics, Haver Analytics, Bank of Canada