Canadian Dollar: Business sentiment weakens as prices rise - RBC

Claire Fan of the Royal Bank of Canada (RBC) reveals that Canadian business sentiment initially rose through August 21 but then significantly declined following the collapse of Canada-U.S. trade discussions. Expectations for exports and investments declined, while inflation expectations surged, with 50% of businesses intending to pass on cost hikes to consumers.

Near-term inflation expectations remain high, while longer-term expectations have increased notably due to the ongoing Middle East conflict. Business conditions improved up until early August, but after the end of the Canada-U.S. trade talks on August 21, there are indications of weakening sentiment, exports, and investment, alongside rising inflation expectations.

Inflation expectations for firms one to two years ahead fell between May and August as oil prices and trade uncertainty stabilized, but they rebounded in September to levels similar to early spring as these trends reversed. While near-term inflation expectations were below the elevated April levels through July and August, they surged sharply in September, reaching 3.7% for one-year-ahead and 3.1% for two-years-ahead.

Notably, half of the surveyed firms plan to pass on cost increases to customers. In Q3, it is worth noting that while consumer near-term inflation expectations have remained unchanged at elevated levels, longer-term expectations (five-year-ahead) have risen significantly, primarily driven by the ongoing war in the Middle East.