Treasury
Bank of Canada Surveys Were Improving, But Post Conflict Are "Less Rosy," says UBS
While the two Bank of Canada surveys for Q1 released on Monday were largely conducted ahead of the recent rise in Middle East tensions, both showed improved sentiment with expectations that the weight of trade tensions would lessen, says UBS.UBS noted the BoC complemented its usual survey with special surveys of businesses (BOS) and consumers (CSCE) conducted after the beginning of the war in the Middle East. The findings from this show that consumers expect the shock to depress the economy and boost inflation, wrote the bank in a note to clients.For firms, despite expectations that the energy price shock will boost input costs, they seem to acknowledge that they are limited in the extent to which they can pass through the cost increase to consumers, due to limited pricing power driven by weaker demand and increased competition, said UBS.UBS noted the BoC published a box on the impact of the war in the Middle East after the initial wave of the survey data collection. With 20 firms selected, the BoC noted that most expected higher input costs, specifically for fuel, freight, fertilizer, and via moves in the Canadian dollar (CAD or loonie). Inflation expectations at the one- and two-year horizon shifted up when firms were asked post-Middle East conflict, while the impact on the five-year horizon was more muted. "Despite this expectation for higher input costs, though, there was an awareness amongst the businesses surveyed that they would be unable to pass through these cost increases fully, given the generally weak demand in the Canadian economy, constrained consumer budgets, elevated competition and generally weak pricing power."In The Canadian Survey of Consumer Expectations (CSCE), the BoC also provided a little more color on how households were responding to the uncertainty brought by conflict. It found 21% of respondents have canceled or postponed trips, mainly due to increases in travel costs, and 28% have postponed or reduced major spending more broadly, added UBS.UBS noted the BOS also highlighted firms thought households might reduce their discretionary spending because of higher gasoline prices, adding pressure to household balance sheets.
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