Canadian businesses and households don’t see a bright future for the economy in the upcoming months. The Bank of Canada (BoC) released its Business Outlook Survey (BOS) for Q3 2022, and showed a massive erosion of the index. The index has only seen such a substantial decline immediately before a recession. BMO warned investors that data from the BoC shows most households and businesses now expect a recession.
Canada’s Business Sentiment Flags A Recession
The BOS index plunged sharply, at a speed that typically precedes recession — big ones, too. The indicator dropped 3.18 points to just 1.68% in Q3 2022, the third largest drop on record. Benjamin Reitzes, BMO’s rate and macro strategist, warned the only larger drops occurred before the pandemic, and Global Financial Crisis. This isn’t a run of the mill deterioration in business sentiment, it’s a sharp decline.
Most Businesses and Households Now See A Recession
Canadian businesses and households aren’t very optimistic about the future, but it may help lower inflation. “The survey also showed a majority of businesses and households see 50% or greater odds of a recession in the next year,” said Reitez.
Adding, “that would take care of the BoC’s excess demand problem and inflation would likely follow it lower.”
Expect A Hawkish Central Bank
Despite the expected cooling, most businesses don’t see inflation cooling anytime soon, and that might lead to higher rates. “The BoC’s consumer survey showed heightened inflation worries, which is making policymakers uncomfortable. The latter is a key reason to expect hawkish rhetoric to persist,” he said.
Managing inflation expectations are important to controlling inflation. When businesses and households expect higher growth, they tend to more easily absorb it, and consume more immediately. However, with news of an upcoming recession, spending is likely to taper, slowing demand and price growth.
