Business Sentiment Improves While Households are Keen to Keep Spending
January 13, 2020
Focus Area—Canadian Economics
The Conference Board of Canada’s Senior Economist Cory Renner offers the following insights on today’s Labour Force Survey (LFS):
“The data released this morning by the Bank of Canada shows a small improvement in business sentiment and points to a continued increase in consumer spending over the next year. Households indicated that they expect to increase their spending at a faster pace than their income growth. This result will likely add to the Bank’s household vulnerabilities concern and provides another reason for them to avoid cutting interest rates this year.”
- Results from the latest Bank of Canada’s Business Outlook Survey show a small improvement in business sentiment during the past quarter.
- Regional disparities continue to be evident in the survey results. Hiring intentions improved nationally but the gain was concentrated in Quebec and British Columbia. Capacity pressures also increased with the Bank suggesting that excess economic capacity has been absorbed except for in the Prairies where demand was weak, and labour was readily available.
- Outside of the energy-producing regions, firms were optimistic about their sales prospects over the next 12 months citing strong domestic demand and improved orders from foreign clients.
- For the first time, the Bank of Canada has published results from its Canadian Survey of Consumer Expectations which provides highlights of consumer expectations around inflation, the labour market and household finances.
- Survey respondents indicated they expect inflation to average 2.1 per cent in one year and the 2-year-ahead inflation expectation was 2.9 per cent—the upper end of the Bank of Canada’s inflation target range.
- Consumers are expecting their wages to grow by 2.0 per cent over the next year, below their inflation expectations and well below the pace of recent wage gains, which were 3.6 per cent in November.
- Views on the labour market were roughly unchanged compared to the third quarter of 2019. The likelihood of voluntary turnover was at a survey high (indicating strong labour market conditions) but the probability respondents assigned to losing their job was also at a survey high (indicating weakness in the job market).
- With a smaller labour force and solid job gains, the unemployment rate fell to 5.6 per cent.
- Consumers indicated that they expect their spending to increase at a 3.4 per cent pace over the next 12 months, well above their 2.1 per cent predicted income growth which suggests a drawdown in savings or an increase in debt. With the Bank worried about an increase in household financial vulnerabilities given high debt levels, they will likely be watching this development closely.
- Overall, this morning’s data releases from the Bank are in line with our forecast for continued, albeit modest, economic growth this year with an increase in business investment and consumer spending both supporting the expansion. With the Bank’s survey’s pointing to continued economic growth alongside their concern over high household debt levels, we don’t expect to see any change in Canada’s overnight rate this year.