OTTAWA - The fourth quarter of 2023 saw a significant increase in pessimism among Canadian business executives, reaching a two-year high. According to a quarterly survey conducted by the Canadian Chamber of Commerce and Statistics Canada, nearly 16,000 organizations participated in the study, revealing a further deterioration in the outlook among executives.

The aggressive and accelerated rise in interest rates implemented by the Bank of Canada is having a profound impact on output, with a 1.1% annualized decline recorded in the third quarter. Economists suggest that Canada's gross domestic product would have experienced an even greater drop without the substantial increase in government spending.

Patrick Gill, head of the chamber's business-data lab, noted that the survey results highlight how businesses are feeling the effects of higher rates, particularly through increased borrowing costs and reduced sales.

Bleak Predictions for 2024

Economists are predicting weak to near-zero growth for Canada in 2024 as households brace themselves for higher debt payments, resulting in reduced consumption. A staggering $700 billion Canadian dollars (equivalent to $515 billion) in mortgage loans are set to be renewed in 2024 and 2025 at higher interest rates. Unlike the United States, mortgages in Canada tend to have shorter terms, often lasting five years.

With the Bank of Canada's benchmark interest rate currently at 5% - a significant increase of 4.75 percentage points since March of the previous year - central bank officials have stated that there will be no consideration for rate cuts until there is concrete evidence indicating a sustainable downward trend in core inflation. Core inflation excludes volatile items such as food and energy and aims to reach a target rate of 2%.

Overall, Canadian businesses are grappling with challenging economic conditions, heightening pessimism among executives and leading to cautionary measures in hiring and sales expectations for the early months of 2024.

Business Outlook Remains Positive, Despite Some Concerns

The latest business conditions survey revealed that 66% of respondents maintain an optimistic outlook for the next 12 months. While this figure is consistent with the previous quarter, it is slightly lower than the 73% recorded in the second quarter. On the other hand, the proportion of respondents with a pessimistic outlook saw a rise to nearly 21% in the fourth quarter, up from 18% in the prior quarter and 15% in the April-to-June period.

According to the survey results, more business executives anticipate slight decreases in both sales and employment levels in the first quarter. Among the challenges facing firms in the short term, inflation ranked highest with 57% of respondents listing it as their primary concern, closely followed by input costs.

Financial concerns were further compounded by higher interest rates, as stated by the survey. This resulted in 24% of business executives planning to raise prices for customers in the first quarter. Although this figure has decreased from a peak of 39% in mid-2022, it still remains elevated compared to levels seen in 2021, according to the chamber.

Monitoring various factors, such as corporate-pricing behavior, wage gains, and inflation expectations, the Bank of Canada aims to determine when it may be appropriate to consider rate cuts. Bank officials have noted that pricing behavior by companies is gradually returning to pre-pandemic norms, albeit at a slow pace. The joint chamber-data agency survey indicates that approximately two-thirds of businesses expect either continued annual wage growth of 4.8% or a deceleration in the coming year.

In its most recent policy decision, the central bank decided to keep the benchmark rate unchanged at 5%. They stated that there are no longer signs of an overheated labor market or economy.

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