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

• In response to high inflation and rising interest rates, consumers have reduced their purchases of a broad range of goods and services. High food prices are a particular source of frustration for households.
• Access to credit has worsened, and real wages have continued to decline. As a result, a growing share of Canadians plan to further cut or postpone purchases in the coming months.
• Most consumers expect a mild to moderate recession in Canada within the next 12 months. Of respondents who indicated a recession would affect them, a majority anticipate they would have difficulty paying bills or would face other financial impacts. However, less than one-sixth of respondents who expect to be affected by a recession anticipate losing their job.
• Expectations for inflation one year from now remain elevated at a high level, while actual inflation steadied.
• Respondents’ views about the path of inflation over the next five years remain varied. More consumers than before the pandemic anticipate deflation in five years. Expectations for deflation appear to be tied mainly to the resolution of supply chain bottlenecks, which some respondents believe could partially reverse the unusually strong price increases Canadians have recently experienced.

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.”

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.”

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:

• higher interest rates
• stricter financing terms (i.e., down payment, collateral, etc.)

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.

Expectations for real wage growth are also affecting consumers’ spending plans. Wage growth expectations ticked down, though expectations for inflation remain high.1 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.

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.

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.”

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.

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:

• supply chain disruptions
• Russia’s war in Ukraine
• high energy prices
• labour shortages

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.

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.

The Canadian Survey of Consumer Expectations gathers respondents’ views on inflation, the labour market and household finances. Additional information on the survey and its content is available on the Bank of Canada’s website. The survey report summarizes opinions expressed by the respondents and does not necessarily reflect the views of the Bank of Canada.