The Bank of Canada says business and consumer sentiment remained subdued during the second quarter of the year even as the country saw its first interest rate cut in years.
The central bank's survey of consumers released Monday shows financial stress remained high over the spring and Canadians' outlook for the future economy was "pessimistic."
Those views pushed many to reduce spending, pay off debt, move savings to accounts with higher interest rates and look to boost household income, the bank said.
"One thing we’ve repeated often as rates began to rise and mortgages began to reset higher was that Canadians will pay their mortgage first, but likely cut back on those discretionary items—there’s even more evidence of that here," Robert Kavcic, a senior economist with the Bank of Montreal, said in a note to investors.
The mood among business owners was similar.
The bank's survey of executives, also released Monday, found corporate leaders remained more pessimistic than average and their investment spending plans are below average.
They blamed their sentiment on elevated interest rates, the persistence of high costs and weak demand, particularly for non-essential goods and services.
They noted consumers are price-sensitive and often trading down to less-expensive products or looking for discounts before deciding to purchase.
Despite the subdued sentiment, at least one analyst saw some bright spots in the surveys.
"Firms' own pricing plans also appear to be normalizing, with fewer companies expecting to make abnormally large price increases and more firms expecting to keep prices flat," wrote Andrew Grantham of CIBC Economics in a note to investors.
"This expected easing in inflationary pressures will be good news for the Bank of Canada as policymakers decide whether to cut interest rates again this month."
The rate has sat at 4.75 per cent since June, when the bank made its first cut since March 2020. Its next rate decision is scheduled for July 24.
Grantham believes another cut of a quarter of a percentage point will follow soon. He said the release of new inflation data Tuesday could weigh on a future rate move.
Should Tuesday's announcement show there has been an easing of inflationary pressures, "the Bank of Canada will have more reason for another rate cut," TD Bank economist Maria Solovieva said in a note.
She added there is currently a 78 per cent probability of a July rate cut.
As the bank mulls its forthcoming decision, businesses linked to essential spending have said they are faring better because they're seeing population growth continuing to benefit their sales, the survey found.
Businesses across all regions and sectors also reported the labour market has continued to ease and the share of firms experiencing worker shortages is near survey lows.
The intensity of the shortages that remain is at its lowest point since 2009, added BMO's Kavcic.
"This survey made it even clearer that Canada’s labour market is no longer tight, and might actually be loosening significantly," he said.
"Hiring intentions weakened in Q2 to the low end of the historical range—not recession territory, but consistent with periods of weak growth and BoC easing."
The bank attributed the "widespread easing" to softened sales expectations, which mean less demand for workers, and an increased supply of labourers due to immigration.
Fewer firms also told the bank that they are preparing for a recession. Their focus is now shifting toward taxes and regulation, which they see as slowing their business plans.
On the consumer front, the bank's research revealed homebuying intentions were close to the historical average because many Canadians, including newcomers, said they planned to wade into the market soon.
When consumers were asked what was fuelling their itch to buy a home, most said they felt home affordability was improving while others noticed rising rent prices, which they felt made buying property and making mortgage payments instead more attractive.
This report by The Canadian Press was first published July 15, 2024.
Tara Deschamps, The Canadian Press
