The Bank of Canada reported that the Iran conflict negatively impacted business confidence and led to an increase in inflation expectations, according to its latest business outlook surveys released on Monday. In response to these economic challenges, the central bank has introduced new metrics to monitor sales and price trends in a volatile global environment.
The surveys revealed a rise in input costs and geopolitical uncertainties over the past three months, affecting sales projections for most non-oil and gas firms in the Prairies. Concerns about a potential recession in the coming year also saw an uptick, with 17% of businesses preparing for a downturn, nearly double the figure from the previous quarter.
Despite these challenges, businesses reported reduced uncertainty related to trade disruptions with the United States, while export prospects improved due to higher commodity prices and demand for artificial intelligence inputs. Inflation expectations surged in the second quarter, driven by escalating energy prices associated with the Middle East conflict.
The central bank noted a significant increase in projected price hikes, reaching a four-year high in the last quarter. The surveys, primarily conducted in May during heightened uncertainty surrounding the Iran conflict, indicated that inflation expectations peaked in April and decreased following the signing of a peace agreement in mid-June.
Consumer spending intentions declined in the recent quarter, particularly among households anticipating higher prices due to the Middle East tensions. Wary consumers were seen seeking discounts, reducing driving, and delaying major purchases.
To provide more comprehensive insights, the Bank of Canada has divided its benchmark indicator into two new measures. One will focus on firms’ expectations for sales, hiring, and investment, while the other will track input and selling prices, wages, and inflation separately. This approach aims to better capture the impact of events like the Iran conflict, which can influence these metrics in opposite directions.
Economists, including BMO’s Robert Kavcic, believe that the recent surveys highlight the central bank’s dilemma in deciding whether to adjust interest rates to stimulate economic activity or combat inflation. With global oil prices stabilizing, it is anticipated that inflation expectations will decrease this quarter, allowing the Bank of Canada to maintain its current interest rate of 2.25% at the upcoming decision on July 15.
