The Bank of Canada’s recent business outlook surveys, released on Monday, revealed that the Iran conflict had a negative impact on business confidence and caused a surge in inflation expectations. To address these challenges and uncertainties, the central bank introduced new metrics to monitor sales and pricing activities in a volatile global environment.
According to the latest surveys, businesses experienced an increase in input costs and geopolitical uncertainty over the past quarter, leading to diminished sales expectations for most firms outside the oil and gas sector in the Prairie region. Concerns about a potential recession also rose, with 17% of businesses anticipating an economic downturn in the coming year, nearly double the figure from the previous quarter.
On a positive note, businesses reported reduced uncertainty related to trade disruptions with the United States, and export outlooks improved due to higher commodity prices and demand for artificial intelligence inputs. Moreover, inflation expectations among businesses surged in the second quarter, driven by escalating energy prices linked to the Middle East conflict.
The Bank of Canada noted that projected price hikes reached a four-year high last quarter, with the majority of surveys conducted during a period of heightened uncertainty surrounding the Iran conflict. Subsequent surveys conducted in later weeks revealed that inflation expectations peaked in April and decreased following the signing of a peace agreement in mid-June.
Consumer spending intentions dipped in the past quarter, particularly among households concerned about potential price increases resulting from geopolitical tensions. These cautious consumers were more inclined to seek discounts, reduce driving, and postpone major purchases.
To provide a more nuanced analysis, the Bank of Canada decided to split its benchmark indicator into two separate measures: one to track firms’ expectations for sales, hiring, and investment, and the other for monitoring input and selling prices, wages, and inflation. This approach aims to better capture the diverging effects of economic shocks, such as the Iran conflict, on different aspects of the economy.
Senior economist Robert Kavcic of BMO highlighted the challenges faced by the Bank of Canada in recent months, balancing the need for stimulating economic activity with concerns about inflation. With global oil prices moderating, it is anticipated that inflation expectations will decrease in the current quarter, allowing the central bank to maintain its current interest rate of 2.25% at the upcoming decision on July 15.