Canadian Business Confidence Declines Once Again, Tying the Worst Period on Record

Canadian Economics

By: Sasan Fouladirad

  • In February, The Conference Board of Canada’s Index of Business Confidence fell 2.0 points to 75.7 (2014=100), the lowest level since the second quarter of 2020. The survey was conducted between January 26 and February 10, 2022.
  • Canadian executives continue to worry about the direction of the Canadian economy, though minor improvements are also apparent. Forty-one per cent of survey respondents said that they expect overall economic conditions to worsen, which is considerably lower than the 59 per cent in the October 2022 survey. Thirty-nine per cent of respondents believe economic conditions will remain the same, which is higher than 28 per cent in the previous survey.
  • Forty-three per cent of survey respondents said that they expect prices in Canada to rise at an annual rate of 5 per cent or greater over the next six months, which is an improvement over the 60 per cent in October 2022.
  • When asked about operational capacity, only 5 per cent of respondents said they are operating above capacity compared to 11 per cent in the previous survey. Forty-four per cent are operating slightly below capacity (38 per cent in the last survey), and 20 per cent are operating substantially below capacity (15 per cent in the previous survey).
  • Seventy-three per cent of respondents believe that their firm’s financial position will worsen or remain the same in the next six months, which is in line with the previous survey. Twenty-seven per cent of respondents believe that their firm’s financial position will improve.
  • When asked if it’s currently the right time to undertake expenditures to expand their plant or add to their stock of machinery and equipment, 21 per cent said it was a good time compared to 19 per cent in October 2022. Seventy-nine per cent said they are either not sure or consider it to be a bad time.
  • Only 6 per cent believe the current return on investment (ROI) is better compared to six months ago. This is eight percentage points lower than the previous survey. Seventy-one per cent believe the current ROI is as expected, while 23 per cent believe it’s worse.

Key Insights

The Index of Business Confidence falls for the sixth-consecutive quarter, tying the record experienced during the 2007-08 financial crisis. During the 2007–08 financial crisis, the Index declined for six-consecutive quarters before reversing course from the first quarter of 2009. Currently, the Index has been trending downward since the third quarter of 2021. Although optimism about economic conditions in Canada over the coming six months has slightly improved (especially worries of inflationary pressures and supply chain constraints), challenges including rising interest rates, weakening demand and higher capital and labour costs continue to worry Canadian executives’ finances and investments.

Higher interest rates are the leading worry for Canadian business executives. In our latest survey, 53 per cent of Canadian executives believed higher interest rates were adversely affecting their planned expenditures over the coming six months, making it the number one concern among respondents. On January 25, the Bank of Canada increased its overnight target by 25 basis points to 4.5 per cent, making it the eighth consecutive time the Bank raised rates over the past year. However, we expect this was the final increase by the Bank, which means Canadian business confidence could start seeing recoveries over the next six months if growth in overall price levels does not surprise to the upside.

Short-term inflation expectations are improving but remain elevated. Fourty-three per cent of survey respondents believe inflation will be at 5 per cent or higher over the coming six months. Though this is a considerable improvement over the 60 per cent in our previous survey, it still shows inflation expectations by Canadian business executives remain above the Bank of Canada’s inflation target in the short-term. Inflation above the Bank’s target could mean firms expect demand for higher wages in the short-term. According to the latest survey results, 51 per cent of respondents pointed to rising labour costs as a major factor adversely affecting their planned expenditures over the next months. There would be less pressure to increase wages if the supply of labour was abundant. However, given the continued labour shortages across the country, especially in services-producing sectors, high labour costs will remain a concern for Canadian business executives, at least in the short-term.