According to a recent survey conducted by the Bank of Canada, business confidence in Canada has reached a new post-pandemic low in the third quarter. The survey revealed that companies are experiencing a deterioration in the sales outlook and facing challenges in meeting short-term financial commitments due to higher interest rates.

Inflation Expectations

Although there has been a slight easing in inflation expectations among the surveyed companies, it remains historically elevated. Approximately 53% of respondents indicated that they expect the consumer-price index to be at 3% or higher over the next two years.

Bank of Canada Survey Results

The Bank of Canada recently released the results of its quarterly Business Outlook Survey, along with another survey measuring consumer expectations. These findings play a crucial role in shaping the Bank's future interest-rate decisions. The next decision is scheduled for October 25th. Last month, the Bank kept its benchmark interest rate unchanged at 5%, citing a weaker phase in the economy. However, it expressed concerns about persistent underlying inflationary pressures and stated its readiness to further increase interest rates if necessary.

Analysts' Perspective

Several analysts believe that the results of the business and consumer surveys should solidify the Bank of Canada's confidence in the effectiveness of higher interest rates in slowing down economic activity. However, some experts argue that there isn't enough evidence to suggest that the economy requires further rate hikes at this time.

Bank of Canada Governor's Statement

Bank of Canada Governor Tiff Macklem emphasized that the recent increase in long-term rates in financial markets is not a substitute for a rate policy aimed at bringing down inflation to the central bank's target of 2%.

Inflation Data and Rate Hikes

The inflation data for September is scheduled to be released on Tuesday. In August, inflation rose to 4% after briefly falling below the 3% mark in June. The Bank of Canada adjusts interest rates to achieve and maintain 2% inflation. Since March of last year, it has implemented a substantial rate-hiking campaign, raising rates by 4.75 percentage points, which is one of the most aggressive among developed-world central banks.

Impact on Canadian Companies

The higher interest rates are significantly impacting the majority of Canadian companies surveyed. More than 70% of firms in the goods and services sectors reported adverse effects due to the increased rates.

Business Confidence and Financial Challenges

The recent survey on business operations reveals that while most businesses remain confident in their ability to repay existing debts, those who rely heavily on interest rates have encountered greater difficulty in fulfilling their short-term financial obligations.

Slowing Consumer Demand

As per the survey, businesses have reported a notable slowdown in consumer demand. Approximately one-third of respondents have experienced a decline in sales over the past 12 months. Moreover, indicators such as sales inquiries and order books suggest that the outlook for sales in the upcoming year has deteriorated compared to the previous quarter. Despite these challenges, 42% of companies still anticipate a rise in sales volume over the next 12 months, while 28% expect a decline.

Business Confidence Hits a Decade Low

The survey's indicator of business confidence has dropped to -3.51, marking its lowest level in over a decade (excluding a brief period early in the Covid-19 pandemic). This decline reflects weaker forecasts for future sales, as well as reduced hiring and investment plans among businesses.

Market experts from TD Securities have remarked on the rapid dissipation of excess demand, which deviated from the central bank's projections for consumer spending made last summer. This points to an increased risk of a hard landing in the economy over the past three months.

Pursuit of a Soft Landing

In hopes of achieving a "soft landing," both the Bank of Canada and the Federal Reserve are carefully adjusting interest rates to moderate economic activity without triggering an economic recession. Conversely, a hard landing refers to a recession triggered by excessively tight monetary conditions.

Capital Spending and Hiring Intentions

According to the survey, one in three businesses expects to reduce their capital spending in the next 12 months due to tighter credit conditions. Additionally, hiring intentions currently sit below historical averages. However, it is worth noting that only 12% of companies plan to implement staff cuts.

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