“Sentiment plummeted”: Canadian consumers are feeling shaky, RBC says

The recently released Bank of Canada Business Outlook Survey revealed that businesses are feeling pretty good but the people they sell to are not.

That’s the takeaway from a new economic update from RBC economist Claire Fan who says the soft report will likely lead to rate cuts.

“The latest Bank of Canada Business Outlook Survey (BOS) confirmed a softening economic backdrop in Q4 as consumer demand further contracted,” Fan wrote. “Sentiment plummeted and top concerns among business saw a decisive shift to more demand-oriented factors including uncertainty (in economic conditions), insufficient demand and access to credit, away from challenges like supply chain issues or labour shortages.”

Fan says consumers are the ones taking all this to heart.

“Businesses in Q4 showed some optimism in future sales but that was not echoed by the consumers,” she wrote. “In the separate Canadian Survey on Consumer Expectations (CSCE), households reported an increase in the amount of financial stress they faced in Q4. Over two quarters of consumers suggested that they have either already or were planning to cut spending, in light of expectations for impact from rising interest rates.”

The economist says she expects softness to continue enough that it will eventually force the Feds’ hand on interest rates.

“Details reported in today’s Bank of Canada surveys were largely in line with prior expectations,” she noted. “Businesses reported further deterioration in economic activity in Q4 amid ongoing easing in consumer demand,” the economist said. “The BoC has been watching firm pricing and wage growth closely for signs that recent slowing inflation will persist – and both measures continued to trend (albeit slowly) back towards ‘normal’ levels. That for the most part confirms the cautiously optimistic view among BoC officials that interest rates are high enough for now. Inflation readings are still too firm to justify immediate rate cuts from the central bank, but we look for a softer economic backdrop and further easing in price pressures will push the BoC to pivot to gradual rate cuts by mid-year.”