Canada Business Outlook Survey

Weak Business Outlook Clouds Near-Term
Growth, Paves Way for Further Rate Cuts

Subdued sentiment amid sluggish sales expectations. As a measure of Canada’s overall business conditions, the Bank of Canada’s Business Outlook Survey Indicator fell in the second quarter of 2024, sitting below its historical average. Firms expected weaker sales over the next 12 months, with a particularly pessimistic outlook from businesses related to discretionary spending. The anticipation of continued moderation in consumer demand, coupled with elevated interest rates, led to softer inflation expectations among survey respondents. While the subpar business conditions suggest a possible easing in near-term GDP growth, the share of firms budgeting for a recession over the next 12 months decreased. This reflects businesses’ confidence in next year’s economy, likely linked to the beginning of the BoC’s policy easing cycle.

Central Bank to advance its policy easing cycle. In addition to cooling consumer demand, the survey also shows businesses’ fading concerns about labour shortages, expectations of lower wage growth, and fewer supply chain bottlenecks hindering production. These supply-side improvements have helped normalize firms’ pricing behaviour, resulting in smaller and less frequent price increases. With the headline inflation rate consistently remaining within the BoC’s target range since the bank’s rate cut in June, weak business conditions were another reason why the Bank of Canada undertook a second consecutive interest rate reduction in July. Combined with normalizing price growth, a loosening labour market and below-potential GDP growth, additional rate cuts are expected to materialize over the remainder of the year.

Commercial Real Estate Outlook

Essential retail better positioned amid slowing economy. While the overall sales outlook dimmed, survey respondents tied to essential consumer spending reported improving sentiment. Besides higher mortgage and rent payments, which are key factors shifting consumer preferences toward nondiscretionary spending, these firms also attributed expectations of stronger sales to Canada’s record population growth. In the real estate sector, this optimism is expected to drive healthy space demand for suburban properties, where essential retail offerings are highly concentrated. However, as aggregate demand wanes, total net absorption will likely soften this year. Nevertheless, Canada’s retail property sector will hold as a preferred investment option as the market will remain well below equilibrium, with vacancy stabilizing below 2.0 per cent.

Ongoing rebalancing in industrial sector may be nearing its end. With growth normalizing in Canada’s manufacturing, transportation and warehousing industries, softening space demand and a large influx of new construction lifted the industrial vacancy rate to 3.0 per cent in the second quarter of 2024. However, this upward trend may peak in the coming quarters. According to the survey, while firms’ intentions to invest in machinery and equipment remained below the historical average, businesses related to industrial and heavy civil construction expected sales to pick up after several quarters of weakness. These areas of strength could signal an early recovery in demand for industrial spaces, aided by lower interest rates. This could help the industrial vacancy rate stabilize in 2025 and beyond, after more than two years of increasing availability.

*  Percentage of firms reporting improvement minus the percentage reporting deterioration. 
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada; CoStar Group Inc.