Bank of Canada Survey Reveals Rising Optimism Amid Trade Tensions

Bank of Canada Survey Reveals Rising Optimism Amid Trade Tensions

22 Jan, 2025

The Bank of Canada’s latest business outlook survey reveals signs of economic stabilization, although uncertainties persist due to US trade policies under President Donald Trump. The central bank’s business outlook indicator rose to -1.2 in the final quarter, a significant improvement from the previous -2.3. This marks the third consecutive quarter of progress, with the indicator reaching its highest level since early 2023.

The Bank of Canada noted “emerging optimism” and “tangible improvements” in business activity, largely driven by lower interest rates and slowing inflation. Businesses are now more optimistic about sales growth and investment intentions. The survey highlights that companies expect higher sales activity over the next year and are resuming investment plans that had been delayed due to previous uncertainties. Improved demand outlooks and lower financing costs have fueled this renewed optimism.

However, despite the positive outlook, trade concerns linked to President Trump’s policies continue to create challenges. Firms are bracing for potential higher input costs, increased selling prices, and reduced capital expenditures. There are also expectations of a decline in employment, as well as both domestic and export sales. Notably, the survey did not fully capture the impact of Trump’s proposed 25 percent tariff on Canada and Mexico, which he announced on November 25.

A separate consumer survey conducted after Trump's tariff comments found Canadians increasingly concerned about economic uncertainty. High housing costs and rising prices for goods and services are impacting consumer spending. Despite these concerns, Canadians remain optimistic, with expectations of spending growth outpacing price increases for the first time since 2021.

The surveys also revealed concerns about the labor market, with consumers noting a higher likelihood of job loss compared to the previous quarter. Firms reported spare capacity and modest hiring plans. Regarding inflation, both businesses and consumers expect a return to pre-pandemic levels, with firms forecasting cost growth to ease and selling price growth to stabilize within the Bank of Canada’s 2-3 percent target range.

The Bank of Canada will make its next rate decision on January 29, with the benchmark overnight rate currently at 3.25%. Policymakers have indicated a gradual reduction in rates following a series of aggressive cuts since June, as consumer price growth has dropped below 2 percent.

 


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