The Bank of Canada's Q1 surveys suggest that sentiment among businesses and consumers was improving before the war in the Middle East broke out, but follow-up questioning suggests that the conflict is negatively impacting spending plans, said CIBC.
However, it isn't yet resulting in materially higher expectations for inflation beyond the current year, noted the bank after Monday's release of the Bank of Canada's surveys.
The Business Outlook Survey's (BOS) official survey period ran from Feb. 5 to 25, but the BoC undertook follow-up calls between March 18 and 27 with some firms selected based on their potential exposure to the Iran war.
The results show that, in general, business sentiment and expectations had improved slightly relative to the prior quarter, at least before the war in the Middle East, stated CIBC. Investment and hiring expectations had improved, despite reports of capacity constraints and labor shortages remaining low relative to their historic average.
Expectations for future inflation were reasonably stable before the war broke out, and longer-term expectations haven't risen too much subsequently. Follow-up questioning from the BoC shows that one-year ahead inflation expectations had risen to 3.8% as of the last two weeks of March, up from 3% in February.
However, the five-year ahead expectation has increased only "modestly" to 3.0%, from 2.8% in February. Of the 20 companies surveyed for these follow-up questions, expectations for higher input costs were widespread, but the outlook for selling prices was more mixed, added the bank.
While some mentioned contract clauses allowing a pass-through of fuel price increases, others expressed concern about their ability to pass on higher costs due to a variety of reasons, including weak demand, consumer constraints and high competition.
The BoC's Q1 Canadian Survey of Consumer Expectations showed that before the sharp rise in gasoline prices, consumers were becoming slightly less pessimistic about the outlook for spending, and inflation expectations were largely unchanged from the prior quarter.
However, a follow-up online survey conducted after the outbreak of the war, between March 26 and April 2, showed that consumers are expecting a negative hit to the economy and higher inflation because of the conflict in the Middle East. Roughly one in four households suggested that they were already cancelling or delaying spending in some areas as a result, pointed out CIBC.