Two quarterly surveys by the Bank of Canada show business and consumer confidence were improving in the opening months of the year, with almost two-thirds of businesses saying their sales had reached or exceeded prepandemic levels and consumers reporting plans to increase spending as vaccination campaigns pick up the pace.
The surveys were conducted from mid-February to early March, so they do not capture the impact of the latest round of lockdowns in several provinces or the worrying rise in the number of new COVID-19 cases.
“Many firms consider the impacts of the pandemic on their activities to be behind them,” the bank said, although it said sectors such as tourism and non-essential retail continue to struggle.
Businesses across a range of industries reported improved sales outlooks, with indicators such as order books and sales inquiries showing an uptick in demand. Companies tied to housing and household goods, such as construction, appliances and real estate, are seeing particular strength, “supported by low interest rates and a shift in consumer preferences to products and services that make it easier for Canadians to stay at home and reduce contact with others,” the bank said.
Meanwhile, consumers told the central bank that they expect to spend more as vaccination becomes widespread and businesses reopen. The Survey of Consumer Expectations found the gap between spending expectations and income growth expectations is the widest it has been in the history of the survey.
“This suggests that households could become more confident in their spending after the pandemic has subsided and may be willing to spend some of their accumulated savings. In fact, respondents anticipate spending more than one-third of their extra savings accumulated during the pandemic over the coming two years,” the bank said.
This uptick in consumer-spending expectations is important as the bank tries to model the trajectory of the economy ahead of a key rate decision and economic update next week. In a speech last month, deputy bank governor Lawrence Schembri said household savings increased by $180-billion last year, or about $5,800 a person, as many Canadians spent less and pocketed generous support cheques from the federal government.
At the time, the bank was modelling a scenario in which Canadians spent about 15 per cent of their additional savings, which would amount to about $25-billion worth of expenditure over the next three years. If consumers spend a larger portion of their accumulated savings than the bank is projecting, aggregate demand will be significantly higher, putting upward pressure on inflation.
Business expectations for inflation are beginning to tick up, partly on the assumption of increased consumer spending and partly because of rising commodity prices. More than half the respondents to the Business Outlook Survey said they expect inflation to be more than 2 per cent over the next two years.
“Because of improved demand conditions and a desire to rebuild their margins, firms across most sectors intend to increase their selling prices at a greater rate than over the past 12 months,” the bank said, adding the expected price increases “remain modest.”
Consumer views about inflation are more muted. The consumer survey found near-term inflation expectations have declined since the previous survey, although longer-term expectations for inflation increased slightly. Over all, consumer perceptions about price growth remain “well anchored” within the 1-per-cent to 3-per-cent target range, the bank said.
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