Business Confidence Continues to Fall

Canadian Economics

  • The Conference Board of Canada’s Index of Business Confidence dropped 0.8 percentage points to 70.7 (2014 = 100) in October. The Index now sits 33.9 points below its last peak in the second quarter of 2021.
  • The latest descent was primarily driven by a 7.7 per cent reduction in the number of respondents who believe now is a good time to invest in their facility or add to their machinery and equipment.
  • A secondary reason for the Index’s fall stems from a 4.3 per cent decline in executives’ beliefs that their firms’ financial positioning will improve over the next half-year.
  • Given that many firms foresee an imminent slowdown, it comes as no surprise that 58.6 per cent of respondents now expect overall economic conditions to worsen over the next six months—a significant uptick from 39.5 per cent in July.
  • Capacity utilization rates continue to be inauspicious as more than 60 per cent of businesses have been operating below their optimal capacity over the past year. This figure has surpassed 65 per cent in our two most recent surveys.
  • Artificial intelligence tools are starting to have an impact on investment decisions as indicated by 18.7 per cent of respondents. Several businesses continue to highlight the benefits AI has on firm-level productivity through automation and digitization.
  • There is some cautious optimism, however, as just 22.3 per cent of business executives expect prices in Canada to rise at an annual rate of five per cent or higher—a 38 per cent improvement from the third quarter of 2022.
  • Overall, capital investment levels are forecast to contract modestly over the next six months as the bulk of survey respondents continue to show concern in a period of ongoing economic uncertainty.

Key Insights

The Index of Business Confidence fell for the ninth straight quarter. It has been over two years since the last time the Index rose, and the latest drop adds to the worst downward spell on record. Although inflationary pressures have started to ease, various factors such as high interest rates, rising labour costs, government policies, and shortage of qualified staff are currently having detrimental effects on firms’ planned investment spending. These factors were each indicated by more than 40 per cent of survey participants and constitute the leading concerns impacting investment expenditures.

For the third time in the last four quarters, Canadian business executives are most concerned about high interest rates. About 54 per cent of survey respondents believe high interest rates are currently having an adverse impact on their planned expenditures, a figure approximately 5 percentage points higher than the second-ranked concern involving rising labor costs. The Bank of Canada held its benchmark interest rate at 5 per cent in September, but their next announcement is set to take place on October 25. Seeing as 59 per cent of survey participants expect their firms’ borrowing rates to remain the same over the next six months, another rate hike could come as a shock to many Canadian businesses.

Ontario remains a safe haven for planned investment. In each of our last four surveys, more than 40 per cent of Canadian business executives have identified Ontario as the primary region for their upcoming investment expenditures over the next six months. Ontario’s most recent share, which sits at 46.9 per cent, is nearly 4 percentage points higher than the province’s five-year average. With major investments in the automotive sector continuing to make headlines in the region, and manufacturing supply chains much improved compared to a few years ago, it is unsurprising that this percentage has risen in recent surveys.

An aerial view of a highway interchange in late evening sunlight

For a more in-depth view on business investment, please see our most recent Canadian Business and Industry Outlook.