The Bank of Canada’s Trade Outlook Indicator Reaches All-Time High

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Canadian business and consumer confidence was optimistic in the third quarter, but inflationary pressures, labor shortages and supply chain disruptions are calling the country’s economic outlook into question, a new poll by the central bank.

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Canadian business confidence rose in the third quarter to its highest level since 2003, thanks to strong demand both at home and abroad, according to the Bank of Canada’s quarterly report Business Outlook Survey published Monday. As Canadians resume their normal spending activities, this growing demand prompts a greater proportion of businesses to increase their capital spending and headcount over the next year.

“A growing number of respondents plan to raise wages to address the challenges of attracting and retaining a workforce. Bank said, corroborating other studies that suggest employers are struggling with worker shortages. “Companies intend to continue to pass increases in labor and other input costs on to their customers.”

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The increase in demand is supporting a central bank report released the same day, which showed consumers preparing to open their wallets and release their savings, even with the Delta variant making some spenders hesitant.

“More than 40% of those polled said they saved more than usual during the pandemic, often because they cut back on spending,” the bank said in its report. “Respondents who have accumulated savings plan to spend about a third of those funds by the end of 2022 – in fact, they said they have already spent about 10% of their extra savings in 2021.”

But a few headwinds continue to dampen sentiment the central bank will consider ahead of its next decision on interest rates and asset purchases on October 27.

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The survey took place between late August and mid-September, just as concerns about supply constraints and inflation began to escalate.

Consumers expect inflation to exceed three percent next year amid rising costs of living, especially for food, gasoline and major purchases such as cars. Almost half of respondents to the business survey expect inflation to float above three percent in the next two years, while 42 percent expect inflation to float above three percent in the next two years, while 42 percent expect inflation remains between two and three percent.

Bank of Canada policymakers are likely to pay attention to parts of the reports that indicate the majority of businesses and consumers expect the rise in inflation to be temporary, per the bank’s own narrative. Inflation jumped 4.1% in August from a year earlier, the highest since 2003, according to the latest data.

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At the heart of business challenges are capacity pressures that lead some businesses to pass prices on to consumers and limit sales.

Supply chain disruptions hit companies hard, which reported congested ports and raw material backlogs became more severe from the second quarter with no signs of easing until the second half of 2022. This prompted a record 65% of those surveyed said they would have significant difficulty or difficulty meeting an unexpected spike in demand.

“Supply chain disruptions are limiting production and replenishment of inventory, while labor shortages are leading to reduced operating hours for some companies,” wrote Sri Thanabalasingam, senior economist at the Toronto-Dominion Bank, in a note to clients. “If left unresolved, these factors could slow the pace of Canada’s economic recovery.

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Labor shortages have intensified since last year, companies also reported, even as the labor market is weak. Unemployment fell in September to 6.9 percent, the lowest since February of last year. Businesses blamed the shrinking workforce on government income supports, worker health issues, delayed immigration and an aging population, as well as a growing skills mismatch. Workforce.

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“Companies have also reported slightly higher retirement and departure rates among staff compared to pre-pandemic standards, suggesting that a change in worker preferences may affect labor availability. ‘work,’ the bank noted in its report.

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As a result, employment intentions hit record highs in the third quarter, with a net 67% of companies saying they would add more people to help meet expectations of increased sales. However, companies do not anticipate a full labor market recovery over the next 12 months.

“Despite rising inflation expectations for businesses and consumers in the near term, this report suggests that the Bank of Canada can comfortably continue to push back hawkish prices from rate hikes through the markets,” Royce Mendes, Senior Economist to the Canadian Imperial Bank of Commerce, written in a note to clients.

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