Firms see Canada escaping worst tariff outcomes, survey shows

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Uncertainty about U.S. President Donald Trump’s trade policy is curbing Canadian business investment and consumer spending, even though firms see the economy avoiding a bad recession, central bank surveys show.

In the first quarterly reports since the Bank of Canada paused rate cuts in April, businesses and consumers appear to have adopted policymakers’ cautious stance amid rapidly changing tariff and trade policy. Firms slowed hiring and investment, while Canadians tightened their belts due to fear of job losses.

The central bank’s business outlook indicator fell to its lowest level in a year, reaching minus 2.42 in the second quarter, from minus 2.12 previously.

Monday’s reports are supportive of views from some economists and market participants that the central bank will hold its policy rate at 2.75% for a third meeting on July 30 amid firm core inflation.

Uncertainty around financial, economic and political conditions remain the top concern for businesses. Worries about the broader impacts of tariffs on the global and Canadian economy overtook worries about the direct impact of U.S. levies. Firms are holding off on new investment plans and “conservatively manage their finances” as a result.

Near-term sales expectations deteriorated, with firms reporting weaker orders, advance bookings and sales inquiries. Investment and hiring intentions remain muted. Businesses are scaling back investment plans, or putting their investments on hold.

However, firms have moderated their expectations for negative impacts, as the worst-case trade scenarios they anticipated earlier this year now appear less likely. Only one-third now expect higher tariff-related costs, compared with about two-thirds in the previous quarter.

The share of firms planning for a recession in Canada has declined to 28%, from 32%, but still remains above 2024 levels.

The outlook also improved among businesses strongly affected by trade tensions. Most exporters in the surveys reported not currently being subjected to tariffs, except those in the steel, aluminum and auto sectors.

Firms said they would lay off workers only if they experienced a sharp and prolonged decline in sales. The share of firms expecting to reduce headcount over the coming year remains largely unchanged and near its historical average.

Concerns about job security have eased marginally. But consumers, especially young people, continued to report that they see a higher-than-average chance of losing their job.

Consumers showed greater caution in their spending decisions, and more of them plan to cut spending in response to their expectations that they would see higher prices for goods, services and housing.

They anticipate their spending will increase more slowly than prices, and plan to cut back on restaurant meals, vacations, furniture, appliances and other discretionary items.

More than half said they plan to reduce their spending on U.S. goods and vacation. In contrast, about 60% of consumers plan to increase their spending on Canadian products and about a third plan to spend more on vacations in Canada.

Roughly half of firms reported already facing higher costs from tariffs, as well as from changing suppliers and developing new markets. Firms now expect their input price growth to accelerate over the next 12 months, but many anticipate “only slight, rather than substantial, increases” in prices.

Some businesses are absorbing a portion of these increased costs — compressing their profit margins to preserve market share — as customers are sensitive to price hikes.

Firms said direct upward price pressures from tariffs are partially offset by slower demand creating disinflation pressures. Inflation expectation for longer horizons have edged slightly higher, but remain with the central bank’s target range.

For consumers, their expectations for inflation five years ahead continued to move higher since the start of the trade conflict, and most measures of expectations remain elevated.

Notably, they expect significant increases in car prices over the next 12 months. Inflation expectations for vehicles are now as high as they were after the Covid-19 pandemic. But inflation expectations for essential goods and services declined.

— With assistance from Curtis Heinzl and Mario Baker Ramirez.