Bank of Canada Poll Shows Tariff Risks Stall Business Plans
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Uncertainty about U.S. President Donald Trump’s trade policy is curbing Canadian business investment and consumer spending, though firms see the economy avoiding a bad recession, .
In the first quarterly reports since pausing rate cuts in April, the Bank of Canada said businesses and consumers appear to have adopted a cautious stance because of rapidly changing tariff policy. Corporations slowed hiring and investment, while households 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. But fewer companies are worried about tariff-related costs.
The July 21 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.
“Firms reported that they are not able to pass on a lot of the cost increases tied to tariffs to consumers due to weak demand, and near-term inflation expectations moved lower for businesses,” Katherine Judge, an economist with Canadian Imperial Bank of Commerce, wrote in a report to investors. “This suggests that slack may not be widening, but is persisting.”
Uncertainty about financial, economic and political conditions is still the top concern for businesses. Executives are now more worried about the broader impact of tariffs on the global and Canadian economies than about the direct effects of U.S. levies. Firms are choosing to “conservatively manage their finances” as a result, the central bank said.
Near-term sales expectations deteriorated, with firms reporting weaker orders, advance bookings and sales inquiries. Investment and hiring intentions remain muted.
“Elevated uncertainty regarding the future trading relationship with the U.S. continued to wreak havoc on firms’ ability to plan for the future,” said Royce Mendes, head of macro strategy at Desjardins Securities. “As a result, firms remained reluctant about investing or hiring new staff.”
(Bloomberg)
However, companies aren’t as pessimistic as they were before — 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.
Firms said direct upward price pressures from tariffs are being partially offset by slower demand, which makes it harder to increase prices. Overall near-term inflation expectations actually fell.
But a record proportion of firms in the survey offered no forecast for how they see price pressures evolving, capturing the uncertainty posed by the trade war.
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The share of firms planning for a recession in Canada has declined to 28%, from 32%, but still remains above 2024 levels.
Many companies 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.
Cautious Consumers
Concerns about job security have eased marginally. But consumers, especially young people, see a higher-than-average chance of losing their job.
Canadian households showed greater caution in their spending decisions, and more of them plan to cut spending in response to their belief 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 vacations. 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.
(Bloomberg)
Roughly half of firms reported facing higher costs from tariffs, as well as from changing suppliers and developing new markets. Companies 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.
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.
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