OTTAWA — Most Canadian businesses expect a mild recession over the next year because higher interest rates are curbing investment plans and spending, while at the same time more see inflation staying high for longer, the Bank of Canada said on Monday.
Business sentiment continued to weaken in the fourth quarter and expectations for slower sales growth increased for a fourth consecutive quarter, according to a quarterly survey. Some two-thirds of firms expect a recession over the next 12 months, with 90% of those expecting it to be mild.
Almost 30% of firms see sales falling over the next year, mainly because of weakening domestic demand. Several firms said rising interest rates were slowing household demand and demand in the housing market.
“Business sentiment has continued to weaken,” the report said. “As a result of rising interest rates, firms’ sales expectations and investment plans are softening.”
When it hiked rates in December at its last policy meeting to 4.25% – the highest level in almost 15 years – the Bank of Canada said it would study economic data to gauge whether to
raise interest rates
In his most recent remarks, Governor Tiff Macklem cited the risk of
sticky – or persistent – inflation
, which would require “much higher” rates.
The survey showed that 84% of firms expect inflation to remain above 3% for the next two years, up from 77% in the third quarter.
Around 71.5% of consumers also expect “a mild to moderate recession” and just under half of those expect it to be “moderate in severity and length,” according to a separate quarterly survey.
Almost 64% of consumers said they would reduce spending and save more to cope with inflation and rising interest rates.
Canada’s annual inflation rate eased to 6.8% in November as gasoline prices rose more slowly, still well above the central bank’s 2% target, data showed last month.
The Canadian dollar was trading 0.1% higher at 1.3388 to the greenback, or 74.69 U.S. cents.
December consumer price figures will be released on Tuesday, and the Bank of Canada will release new forecasts and its next policy decision on Jan 25. (Reporting by Steve Scherer and David Ljunggren in Ottawa, editing by Deepa Babington)