Canadian Survey of Consumer Expectations—Fourth Quarter of 2022

Results of the fourth-quarter survey | Vol. 3.4 | January 16, 2023

This survey took place between October 27 and November 17, 2022. Follow-up interviews took place in November and December 2022.

Overview

Consumers are reducing spending because of higher inflation and rising interest rates

Consumers report spending less on a broad range of goods and services over the past six months (Chart 1). The growing costs of food and other necessities are a key concern for Canadians. Coupled with rising interest rates, these increased costs mean consumers are spending a larger share of their budget on necessities. As a result, they are decreasing their spending on a wide array of other products and services. In a follow-up interview, one survey respondent said, “I spend a lot of money to buy little things.”

Some people link high food inflation to price gouging and profit-taking. In addition to reducing spending on groceries and other goods and services, consumers report changing their buying habits, such as choosing less expensive brands, buying in bulk and looking for discounts. One respondent said, “I am spending more cautiously.”

Chart 1: Higher interest rates and inflation have caused consumers to reduce their spending on many products

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Travel, accommodation, food service and recreation 87.78% Clothing and footwear 73.52% Groceries 58.33% Durables (e.g. cars and home appliances) 49.63% Transportation (e.g. gasoline) 47.96% Repairs, maintenance and other spending 32.41% Education, health and personal care 21.67%

A growing share of consumers plan to continue reducing their spending or to postpone purchases because of elevated inflation and interest rates (Chart 2). This is particularly the case for those with variable-rate mortgages or other debt (e.g., a line of credit used to finance renovations or other major purchases) who are feeling the pinch of higher interest rates. Most often, consumers are curbing spending on discretionary items, such as recreational services, to be able to pay for necessities. They may also delay or cancel larger purchases. For example, some consumers are delaying buying a vehicle. During interviews, one said, “With 8% interest rates for a car loan, interest rates will need to come down or my wheels will come off.”

Chart 2: Consumers plan to postpone or reduce their purchases because of expected inflation and interest rates

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Note: This question was not asked between 2021Q1 and 2022Q1.

Perceived tightening in credit conditions also limits people’s ability to spend. About 6 in 10 respondents reported having more difficulty accessing credit now than they did one year ago, and a similar share expect to face even further difficulty one year from now (Chart 3). People attribute tighter credit conditions primarily to:

Some consumers’ difficulties obtaining credit are leading them to anticipate weaker house price growth. Survey results indicate that most consumers are aware that higher interest rates are affecting affordability and making it hard for some people to purchase a home. Still, many believe the housing market will slow only modestly because they see a shortage of houses for sale in their neighbourhood.

Chart 3: Consumers are finding credit increasingly difficult to access

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* Share of respondents reporting harder credit conditions minus the share reporting easier credit conditions

Expectations for real wage growth are also affecting consumers’ spending plans. Wage growth expectations ticked down, though expectations for inflation remain high. More than half of consumers think earnings will not catch up in the long term with recent inflation (Chart 4). Expectations for wage growth are weak compared with expectations for inflation. This suggests that consumers expect wage gains will not be sufficient for them to afford rising prices. People associate the lack of wage growth with a weakening economy. “[Consumers] can’t afford things; this is why we will be in a recession,” one respondent said.

Chart 4: Most workers do not expect their earnings to catch up with recent inflation

Chart 4: Most workers do not expect their earnings to catch up with recent inflation

Do you expect that your earnings will eventually catch up with recent inflation? (Share of respondents)

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Earnings will fully catch up 13% Earnings have kept up with inflation 16% Earnings will partially catch up 19% I don’t expect my earnings to catch up 52% Fears of a recession persist despite expectations for a solid labour market

Concern about the economy is widespread. On average, consumers said the likelihood of a recession in the next 12 months is 60%. Just under half of those who expect a recession think it will be moderate in severity and length (Chart 5). Among low-income Canadians, expectations are more pessimistic; these consumers are more likely to believe a recession will be severe. In follow-up interviews, respondents linked the duration of the recession to the average Canadian household’s high level of debt and the impact of higher interest rates as homeowners renew their mortgages.

Chart 5: More than two-thirds of consumers expecting a recession think it will not be severe

Chart 5: More than two-thirds of consumers expecting a recession think it will not be severe

How would you characterize the expected downturn in the economy? (Share of respondents who chose each option)

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All respondents Low-income respondents Mild and short-lived 7.02% 3.87% Mild but prolonged 16.99% 13.86% Moderately severe and somewhat long 47.47% 49.53% Severe but short-lived 11.76% 11.08% Severe and prolonged 16.76% 21.66%

Roughly half of households—many of them with low incomes—think they will be negatively affected if a recession occurs (Chart 6). Many people expect their financial assets to fall in value, or they anticipate having difficulty paying bills. Roughly one-fifth of those surveyed expect their employment situation to be impacted, such as through a decline in income, reduced work hours or the loss of their job. Those who work in sectors that are sensitive to interest rates, such as construction, are much more likely than workers in other sectors to anticipate an impact on their job. Because of this worry, some respondents are trying to find ways to reduce their spending and accumulate precautionary savings. For example, one said they are “trying to save more and stay in wait-and-see mode, waiting for the next shoe to drop.”

Chart 6: Many consumers feel a recession would affect their work and financial situation

Chart 6: Many consumers feel a recession would affect their work and financial situation

If a recession were to occur, what would be the most likely and meaningful impact(s) on you or on a member of your household? (Share of respondents who reported they would be affected by a recession)

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Value of financial assets would fall 49.05% Would have more difficulty paying bills 43.74% Income would decline 32.59% Work hours would be cut 15.48% Would lose job 14.64%

Overall, workers think the labour market is strong, but some signs indicate softening. Recently, the Bank of Canada’s experimental Daily Internet Survey of Confidence—a high-frequency survey of Canadians—found that fewer people expect employment to increase in the next six months (Chart 7). However, many respondents to the Canadian Survey of Consumer Expectations said labour shortages and a high number of job vacancies will help stabilize the job market. They anticipate that those who may lose their job during this expected downturn will find a new one more easily than in previous recessions. Some respondents reported that labour shortages are leading to the temporary closure of some local stores. In a follow-up interview, one participant said, “The store was not open because they could not find enough workers.” Consumers cite the steady job market as a reason why Canada may avoid a severe recession.

Chart 7: Consumers perceive the labour market is softening

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Note: These data are from the Bank of Canada’s Daily Internet Survey of Confidence, an experimental online survey of Canadian consumers.Last observation:

The Bank of Canada’s Daily Internet Survey of Confidence is an experimental survey of Canadians conducted online daily. Short-term inflation expectations remain elevated

Expectations for inflation in the near term have stopped climbing but are still high (Chart 8). Many consumers said supply-side issues are preventing the Bank from reaching its inflation target. Challenges include:

People also think high government spending is keeping the Bank from lowering inflation. Looking ahead, consumers anticipate that inflation will slow, and the further into the future they look, the lower their expectations are, on average.

Yet consumers are still concerned about inflation, and some are uncertain about the effectiveness of tightening monetary policy. More than three-quarters of people understand that the Bank is aiming to reduce inflation by raising interest rates. But the share of those who believe that increasing rates will lead to lower inflation remains small at around two-fifths of respondents. Among survey participants who were not aware that Canada has an inflation target, their best guess of the target edged down but remains well above the actual target.

Chart 8: Consumers’ short-term expectations for inflation remain elevated

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Note: This chart presents median values. For an explanation of the computation, see the Overview. The Overview includes the survey questions. This chart is available by demographic characteristics.Last observation:

Expectations for inflation five years from now have edged down and are near survey lows. But opinions vary about where inflation will end up in the long term (Chart 9). About one-third of respondents think inflation will be above 5% in five years; this is near the survey’s average. Lower-income households, females and youth are more likely to expect high inflation. Those who expect high inflation are also more likely to be unaware of the Bank’s inflation target and to have a more pessimistic view of the Canadian economy. In contrast, the share of respondents anticipating deflation is higher than the historical average. See Box 1 for more details.

Chart 9: Compared with before the pandemic, consumer expectations for inflation five years from now are more varied

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2019Q4 2022Q4 Below 0% 10.06% 26.45% 0.0% to 0.9% 2.25% 1.47% 1.0% to 2.9% 24.34% 16.60% 3.0% to 3.9% 13.89% 8.86% 4.0% to 4.9% 8.57% 5.91% 5.0% to 9.9% 20.16% 20.15% 10.0% and above 14.31% 15.46% Box 1: More people than before the pandemic expect deflation in five years

The increase in the share of consumers who believe deflation will occur is widespread. Compared with before the pandemic, more people in all income groups, age categories and education levels expect deflation in five years.

Confusion about the meaning of deflation is not the reason this share is so high. In follow-up interviews, consumers clearly distinguished between disinflation and deflation and did not identify a period of slower inflation as deflation. Further, the increase in the share of consumers expecting deflation is evident across types of respondents, including those with high numeracy and those with low numeracy. In this quarter, more people than before the pandemic reported that they anticipate deflation will occur.

Consumers who anticipate deflation do not seem to link this belief to expectations for a weaker economy. These consumers are less likely than other Canadians to think a recession in the next 12 months is inevitable or to believe a recession, if one did occur, would be severe and prolonged. They are also less likely to think that demand-side issues are preventing the Bank from reaching its inflation target.

Many of those who expect deflation in the long run believe that consumer prices will decrease as the economy recovers from supply-side shocks. In a post-survey interview, one respondent said, “What goes up must come down.” These consumers are likely to point to supply-side factors as drivers of the current difficulties the Bank is experiencing in getting inflation to target (Chart 1‑A). Many think the barriers to returning inflation to target will ease in a year or two (Chart 1‑B). For example, referring to the supply of goods affected by supply chain issues, one said, “I think inflation will drop because supplies will go back up.”

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Note: Responses of supply chain issues, labour shortages and oil and energy prices are counted as supply-side factors. Responses of high government spending are counted as a demand-side factor. Responses of the persistence of the pandemic, a lack of coordination on vaccines, and climate change are counted as other factors. Responses are then pooled and counted only once by factor type.

Supply-side factors 29.91% Demand-side factors 13.24% Other factors 20.33%

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* Includes supply-side, demand-side and other factorsNote: Responses of supply chain issues, labour shortages and oil and energy prices are counted as supply-side factors. Responses of high government spending are counted as a demand-side factor. Responses of the persistence of the pandemic, a lack of coordination on vaccines, and climate change are counted as other factors. Responses are then pooled and counted only once by factor type.

0-2 years 32.28% 3+ years 20.75%