Morning Market Brief: October 17, 2023

Tight financial conditions weighing on Canadian businesses

According to the Bank of Canada (BoC), sentiment among businesses in Canada is falling. Its third-quarter Business Outlook Survey showed high inflation and rising interest rates are weighing on demand, hurting business conditions. The report highlights the uncertainty of the economic environment right now here in Canada.?

• The BoC Business Outlook Survey dropped to -3.5 in the third quarter from -2.2 in the second quarter. The third-quarter reading was the lowest since 2009, outside of the sharp drop amid the COVID-19 pandemic in 2020.
• Businesses indicated that interest-rate increases from the BoC are beginning to weigh on business conditions. Sales have been relatively muted, which has helped lower businesses’ hiring intentions and plans for capital investments.
• Businesses expect inflation to remain above the BoC’s target for the next three years while acknowledging inflation has come down. Still, higher prices are negatively impacting the business environment.
• The BoC also surveyed Canadian consumers, who expressed high prices as their biggest concern. In response, major purchases are likely to decline, particularly those that are typically financed by a loan, such as automobiles.
• The BoC makes its next interest-rate announcement on October 25. While current signals point to the BoC holding steady, the BoC has indicated it would be willing to lift interest rates further if inflation continues to run well above its target.

Weaker sentiment among Canadian households and businesses is hindering spending plans, negatively impacting the overall health of Canada’s economy. When economic conditions weaken, Canadian financial markets might see some volatility. Still, look past the short-term negatives. The Canadian economy and financial markets have proven resilient over the long term. While stocks could experience some volatility, there might be growth as the economy then rebounds, particularly given Canada’s high exposure to cyclical stocks.

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