Despite increasing expectations that interest rates have peaked, many Canadian businesses experienced weaker growth in the fourth quarter and blamed factors including their customers’ financial situations and the impacts of higher rates and inflation, according to the Bank of Canada’s latest business outlook survey.

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“Businesses widely reported that their current sales levels are lower than usual — more than one-third of respondents experienced an outright decline in sales over the past 12 months,” according to the report, which was published Jan. 15.

“High interest rates have negatively impacted a majority of firms, and these firms have relatively muted sales outlooks, modest investment intentions and weak hiring plans.”

There is also concern a swath of upcoming mortgage renewals will further reduce people’s disposable income. 

Growth was particularly muted in construction and real estate, with firms in these sectors saying some projects had been put on hold over the past 12 months due to high interest rates causing demand to decline and financing costs to rise, high construction costs and general economic uncertainty.

Still, there are some signs of optimism, with many firms expecting sales to improve over the course of 2024 if interest rates come down and sales volumes stabilize after declines or weak growth.

“Some firms expect the impacts from previous monetary policy tightening to peak in the first half of 2024 and demand to pick up later in the year,” the report said. “This is particularly true for those in housing and related sectors and often stems from a belief that interest rates will come down over the next year.”

Higher interest rates resulted in a quarter of Canadian companies facing higher borrowing costs than six months earlier, and some also noted a widening in the spread between the prime interest rate and the rate charged by lenders, according to the report.

“In addition, firms noted tighter non-price conditions, such as lenders placing limitations on lines of credit and being less receptive to new debt or equity,” the report said, noting the share of businesses having difficulty accessing credit is notably higher than before the pandemic.

Consumer-facing firms such as retail, housing and accommodation, food and recreation are among those experiencing the most difficulty obtaining credit, the report said. “This often reflects lenders’ expectations of continued weakening in consumer spending.”

Pricing behaviour is slowly returning to normal at Canadian companies, though the report noted some businesses are still instituting larger and more frequent price increases than they did before the COVID‑19 pandemic.

Softer demand, meanwhile, is easing tight labour markets, with most firms reporting they do not feel the need to add new staff and are experiencing less-intense labour shortages than 12 months ago.

Raising wages is becoming less important for attracting new employees and retaining existing staff and some said the number of new immigrants was contributing to improved labour supply.

“Still, wage growth on average is expected to be higher than normal over the next 12 months, often related to cost-of-living adjustments,” the report said, noting that wage growth expectations are declining only gradually due to easing demand for labour.

“The majority of firms think wage growth will be back to normal by 2025.”

The quarterly business outlook survey summarizes interviews conducted by Bank of Canada officials with the senior management of about 100 firms selected to reflect the composition of the gross domestic product of Canada’s business sector.

The fourth-quarter survey was conducted between Nov. 14 and Dec. 1, 2023.

Canadian businesses included in the survey continue to believe, as they did in the third-quarter survey, that it will take a while longer for inflation to return to the central bank’s target of two per cent.

While short-term inflation expectations are slowly trending downward, businesses still expect inflation to remain elevated as a result of wage growth as well as the prices of commodities, food and housing.

“Despite the declining trend in short-term inflation expectations over the past year, the share of businesses that believe inflation will not return to the Bank of Canada’s two-per-cent target in the next four years has risen to about one-quarter of firms,” according to the survey.

“These businesses often cited high prices for energy, food and housing as the main obstacles to a quicker return to the inflation target.”

Despite these inflation expectations, the report said few firms are changing their behaviour in line with their outlook by, for example, adjusting their investment plans and sales strategies.

TD Securities economist Maria Solovieva said in a note after the survey’s release that the central bank’s new business data — combined with a parallel report on consumer sentiment — reveals a growing gap between consumers’ perception of inflation and actual price changes.

This gulf is “creating a real communication challenge for the Bank of Canada as it prepares to step on the path of rate cuts,” the economist wrote, urging the central bank to shift its public messaging to highlight that housing expenses are not the sole determinants of Canada’s wider inflation patterns.

“Failing to make this distinction risks curtailing economic growth by too much,” Solovieva wrote.

• Email: bshecter@postmedia.com

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