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An Eighth Straight Drop in Business Confidence

Artificial Intelligence

By: Jake Lenarduzzi

  • In July, The Conference Board of Canada’s Index of Business Confidence fell 2.9 points to 71.5 (2014 = 100). It has now been two years since the Index’s last increase, which occurred in the second quarter of 2021.
  • The primary drivers behind the latest fall stem from firms’ perspectives on the current state of their finances, operations, and investment expenditures.
  • Although only 16.8 per cent of Canadian executives believe overall economic conditions will improve, the majority still believe that things will remain the same over the next six months.
  • 20.7 per cent of survey respondents said they expect prices in Canada to rise at an annual rate of five per cent or higher over the next six months. While still alarming, this is an improvement from the 27.7 per cent last quarter.
  • From an operational standpoint, 66.1 per cent of firms are currently operating below their optimal capacity—3.3 percentage points higher than our last survey.
  • Financial expectations are all over the spectrum. Our survey reveals that 37.5 per cent of respondents believe their firm’s financial position will remain the same over the next six months, whereas 31.7 per cent believe it will improve and 30.8 per cent believe it will worsen.
  • Closely in line with our survey from last quarter, nearly half of Canadian executives believe their capital investment level will increase to some degree over the next six months—a sign of some cautious optimism.

Key Insights

The Index of Business Confidence fell for the eighth consecutive quarter. Since the second quarter of 2021, the Index has now dropped 33.1 points and continues to be the worst spell on record. Some question marks remain as to when this downward run will take a positive turn, but the general belief must be sooner rather than later. Economic conditions have improved in terms of inflationary pressures, but several factors including high interest rates, labour and capital costs, and government policies are currently having adverse effects on firms’ planned investment levels. These factors were individually indicated by over 40 per cent of survey respondents and represent the most pressing concerns influencing investment spending.

High interest rates reclaimed top spot as the leading worry for Canadian business executives. Our latest survey indicates that 60.3 per cent of respondents believe high interest rates are currently adversely affecting their level of planned expenditures—6.1 percentage points higher than our previous survey. The Bank of Canada raised its benchmark interest rate another 25 basis points in early July and the figure currently sits at 5 per cent for the first time since April 2001. Firms are worried that another increase could come in September, but we believe that the remainder of the year could yield no further rate hikes.

Artificial intelligence (AI) is advancing at a rapid pace and many firms are already exploring how these tools can be used for investment purposes. For the first time, Canadian executives were asked if they believe AI tools will affect their firms’ investment plans over the next six months. Our results suggest that 25.6 per cent of respondents do believe that AI tools will impact investment, whereas 24.8 per cent are still unsure, and the remaining 49.6 per cent do not believe AI tools will factor into their plans over the next six months. Seeing as more than a quarter of respondents are already part of the AI revolution, and chatbots such as ChatGPT have evolved monumentally in a short timespan, it feels like it is only a matter of time before AI tools become a norm in business investment decisions.

For more in-depth insights and analyses on our business and consumer confidence indices, please see our related publications.

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