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The downbeat economic mood among Canadian businesses and consumers is starting to improve, according to a pair of Bank of Canada surveys published Monday, as fewer people expect a recession and many look toward a decline in interest rates over the coming year.

At the same time, consumers continue to report high levels of financial stress. And businesses are pulling back on investment plans in response to high borrowing costs and weak demand for their products and services – a worrying trend when the central bank is already calling low labour productivity and lean business investment a national “emergency.”

The two quarterly surveys are among the last bits of data the Bank of Canada will get ahead of its next interest-rate decision, on April 10.

Crucially for the central bank, the surveys showed business beliefs about future inflation are moderating, although consumer expectations remain stubbornly elevated.

What companies and households think about inflation can feed into price-setting and wage-bargaining decisions, so the central bank is keeping a close eye on expectations as it gauges when to start lowering interest rates from their current two-decade high.

One of the surveys, the central bank’s quarterly survey of businesses, found that fewer companies expect to make unusually large or frequent price changes over the next year. And only about a quarter of the respondents thought inflation would be above the central bank’s 2-per-cent target beyond three years, down from 37 per cent last quarter.

The other survey, of consumers, found less progress on inflation expectations. Perceptions of current inflation have declined, thanks to slower price increases for food and gasoline, which play an outsized role in how households think about inflation.

But consumers continue to believe inflation will remain high well into the future – and those expectations have barely budged. The bank noted that people think government spending, home prices and rising rents are the main causes of high inflation – a perception that could have significant political consequences.

“There were no smoking guns in either report to argue for an imminent shift in the Bank of Canada’s messaging or policy stance,” Toronto-Dominion Bank rate strategists Robert Both and Andrew Kelvin wrote in a note to clients.

“But even without a more substantial decline in consumer inflation expectations, the Bank can still point towards these reports as evidence that monetary policy is working.”

The two surveys paint a mixed picture of the Canadian economy, which has been put into a kind of medically induced coma by the Bank of Canada to fight inflation. The bank is using high interest rates to slow spending and investment with the goal of reducing upward pressure on prices.

The central bank has kept its policy interest rate at 5 per cent since last summer, but has said that it expects to begin lowering rates some time this year as inflation normalizes. The annual rate of Consumer Price Index inflation was 2.8 per cent in February, down from a peak of 8.1 per cent in mid-2022.

Most Bay Street analysts and bond traders expect that the first interest-rate cut since the start of the bank’s rate-hiking campaign will come in June or July.

On the positive side, the business survey showed that fewer companies expect an imminent recession. And constraints on business activity, such as labour shortages and supply chain problems, appear to be easing.

On the downside, indicators of future sales remain weak, and businesses are showing a concerning pullback in plans to invest in machinery and equipment. This can partly be attributed to the “long-lasting impacts of past interest rate increases,” the bank said.

“That’s not going to help Canadian productivity given that the investment that is expected looks to be heavily tilted towards maintenance and repairs instead of growing capacity,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients about the business survey.

“So while policymakers can take some solace in the fact that businesses and consumers are becoming more upbeat, they need to remain on guard about recession risks.”

The reticence to invest comes at a particularly bad moment for labour productivity, which is closely tied to how much companies invest in machinery, equipment and intellectual property. Productivity has fallen in six of the past seven quarters, and Canada is slipping further behind the United States and other peer countries when it comes to the amount of output per hour worked.

In a speech last week, Bank of Canada senior deputy governor Carolyn Rogers said the country’s low productivity is an “emergency” that is putting living standards at risk and making it harder for the central bank to control inflation over time.

Meanwhile, the consumer survey showed that Canadians continue to feel gloomy as they navigate the twin pressures of rising prices and high interest rates.

But confidence is improving in anticipation of rate cuts. The share of survey respondents who plan to decrease spending and boost savings declined slightly in the quarter.

While high interest rates and pricey real estate are constraining home-buying activity, the survey noted an increase in people’s intentions to enter the market.

“This pickup is likely driven in part by newcomers, who typically have stronger buying intentions than other Canadians,” the bank said.

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