Canadian Business Outlook for 2023

By Promit Mukherjee and David Ljunggren

OTTAWA, Jan 20 (Reuters) – Canadian firms see improved demand and sales in the coming year, largely fueled by rate cuts, but are concerned about the potential damage from promised U.S. policies, the Bank of Canada said on Monday.

The Bank’s fourth quarter business outlook survey indicated that overall business sentiment remained subdued. This survey is closely watched by the BoC as it offers insights into companies’ investment and hiring intentions.

The business outlook indicator – a metric of prospects under current economic conditions – improved to -1.18, marking its best standing in the last five quarters, though it continued to be below average.

Only 15% of firms are now planning for a recession in Canada over the upcoming year, down from 16% in the third quarter.

The BoC stated, “After a period of weak demand, firms expect their sales growth to improve over the coming year. This expectation is largely driven by recent interest rate reductions and the anticipation of further cuts ahead.”

Conducted from Nov 7-27, prior to the Bank’s recent 50 basis point cut on Dec 11, the survey noted that U.S. President Donald Trump promised on Nov 25 to impose a 25% tariff on all Canadian imports when he took office.

A separate online poll in December showed widespread uncertainty among business leaders about potential fallout from U.S. policies, with 40% of respondents expecting negative effects.

The Bank has cut rates by a total of 175 basis points since June to stimulate a weak economy and counter rising unemployment, with rates peaking at a two-decade high of 5% before easing.

According to the survey, firms’ intentions to increase investment over the coming year have become more widespread and are well above historical averages. However, uncertainty linked to U.S. trade policy continues to hinder companies from committing to investments, though the energy sector might be an exception.

Companies anticipate that over the next 12 months, their selling prices will grow, but improved demand conditions will facilitate passing on cost increases, restoring margins.

The survey also pointed out that a larger-than-normal share of firms plans to keep employment levels relatively stable the coming year, without the need to reduce staff.

Despite Canada’s economy adding nearly four times the number of jobs forecast in December, reaching its highest levels in almost two years, unemployment remains at historically high levels.

(Reuters Ottawa editorial)