Sentiment among companies in Canada remains more pessimistic than average in April-June after improving slightly in the previous two quarters as continued weak demand and high borrowing costs have discouraged capacity expansion and led to easing labor conditions and lower inflation outlook, the Bank of Canada's quarterly Business Outlook Survey (BOS) showed. Ahead of their next policy rate announcement on July 24, the bank's policymakers will monitor more data including the release on Tuesday of June CPI data to discuss whether the economic conditions will allow the bank to lower interest rates further soon, after conducting its first rate cut since March 2020 in June.

The business outlook indicator fell to minus 2.90 in the second quarter after rising to minus 2.39 in the first quarter of 2024 from minus 3.06 in the fourth quarter and followed minus 3.44 in the third quarter, minus 2.25 in the second quarter of 2023. Excluding the pandemic period, the third-quarter 2023 reading of minus 3.44 is the worst since minus 4.97 in the second quarter of 2009.

"Firms' sales outlooks are mostly unchanged from last quarter and remain more pessimistic than average," the bank said."Businesses tied to discretionary spending reported particularly weak sales expectations, while those tied to essential spending see population growth continuing to benefit their sales."

Investment spending plans also"remain below average" in the face of weak demand, elevated interest rates, uncertainty about the business environment and the high cost of machinery and equipment.

As seen in jobs data, employment creation is not catching up with rapid population growth under Canada's strong immigration policy. The share of firms reporting labour shortages is"near survey lows" but the bank said"few firms plan to reduce headcounts."

Businesses expect the growth of their input prices and selling prices to slow, suggesting that inflation will continue to decline over the coming year, the survey showed. Most firms that made abnormally large price increases in the past 12 months do not plan to do so again in the coming year.

"Firms' expectations for inflation fell in June and are now in the Bank of Canada's inflation-control range (between 1 and 3 percent)," the bank said."In contrast, fiscal policy and housing continue to be seen as fueling inflation and driving some firms' uncertainty about when inflation will return to the bank's 2 percent target," the bank said, adding that most respondents expect inflation to return close to the target within two to three years.

The Bank of Canada's (BoC) publishes a quarterly Business Outlook Survey based on a summary of interviews conducted by the Bank's regional offices with the senior management of about 100 firms, selected in accordance with the composition of Canada's gross domestic product (GDP). The survey's purpose is to gather the perspectives of these businesses on topics of interest to the central bank (such as demand and capacity utilisation) and their forward-looking views on economic activity. Since the BoC is charged with keeping inflation within a specified target range, information on price pressures is watched particularly closely.

The outlook survey is used to evaluate economic conditions prior to four Board meetings a year where the BoC sets interest rate policy. Although monetary policy is announced eight times a year, these reports are available only on a quarterly basis. Market participants speculate for weeks in advance about the possibility of an interest rate change that could be announced upon the end of these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.

If the survey portrays an overheating economy or inflationary pressures, the Bank of Canada may be more inclined to raise interest rates in order to moderate the economic pace. Conversely, if the survey portrays economic difficulties or recessionary conditions, the Bank of Canada may see the need to lower interest rates in order to stimulate activity.