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Canada: Business Optimism and Inflation Expectations Soften 

The Bank of Canada Business Outlook Survey (BOS) reported a continued drop in Canadian business optimism in the third quarter of 2022. The BOS indicator, a statistical summary of survey results, was 1.69 in 2022Q3, down from 4.87 in 2022Q2.

Businesses expect demand to weaken, with the statement noting that “firms’ sales outlooks have softened. Businesses with sales linked to housing activity and household consumption expect weaker sales growth due to rising interest rates.”

On inflation, the statement highlighted that “businesses expect their price increases to moderate due to downward pressure on prices for commodities and other input goods. They also expect their wage increases to soften from high levels.”

On labour and supply chain issues, the BOS stated that “pressures on businesses’ production capacity are still high. Firms’ main bottlenecks remain related to labour constraints and supply chain issues. However, survey results provide early signals that capacity pressures are becoming less severe.”

Key Implications

In today’s release we were looking for signs of slowing economic momentum and a shift in inflation expectations. Given the decline in future sales, we can see that businesses are seeing a fairly quick drop in overall demand. This is passing through to expectations for future inflation, which have declined across all time horizons.

The Bank of Canada should be encouraged by this report. Demand needs to slow in order for inflation to come back to its target range of 1% to 3%. It also needs to make sure that inflation expectations don’t become unmoored. Clearly the Bank’s past actions are having an impact. Though this justifies past rate hikes, we think the BoC needs to keep at it. For this reason, we expect the BoC to continue with a 50 basis point hike next week, pushing rates even more into economically restrictive territory.

TD Bank Financial Group
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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