Bank of Canada survey shows firms can’t shake trade angst

By Erik Hertzberg and Nojoud Al Mallees

(Bloomberg) — The Bank of Canada’s survey of businesses shows firms are still worried the ongoing trade war will limit their sales, though their expectations for inflation eased.

The central bank’s business outlook indicator rose slightly to minus 2.3 in the third quarter, up from minus 2.4 previously. The bank said despite the “gradual improvement,” firms’ outlook and intention “remain subdued.”

“Expectations for growth in domestic export sales remain soft due to concerns about the broad economic effects of trade tensions,” the bank said in the report released Monday.

Firms no longer expect sales growth to strengthen. Policy-makers said they spoke with exporters of the tariff-hit steel and aluminum sectors, which reported “especially weak outlooks.” Those firms also said the levies are “leading to significant layoffs.”

Businesses’ inflation worries moderated, and their one-year-ahead expectations for the consumer price index fell below the peak reached earlier in the trade conflict.

At the same time, firms expect cost increases amid the trade uncertainty and tariffs, though they reiterated that weaker demand is limiting their ability to pass those higher costs on to consumers.

The combined evidence of tariff damage, uncertainty and easing inflation expectations all point to an economy increasingly in excess supply, and suggest officials may be more comfortable cutting borrowing costs. The Bank of Canada’s benchmark overnight rate is currently 2.5%, and policymakers next set rates on Oct. 29.

Markets increasingly expect a quarter-percentage point cut at that meeting, with traders in overnight swaps firming bets to close to 80% after the release. The central bank has faded worries about some elevated measures of core inflation and Governor Tiff Macklem reiterated that he viewed both the labour market and growth as “soft.”

Businesses also reported fewer capacity constraints, and binding labour shortages fell to the lowest level since 2020, the bank said. Firms’ investment intentions remain weak, and most businesses say their outlays are intended to replace or repair machinery and equipment.

Uncertainty was the most cited response when firms were asked about their most pressing concerns, followed by cost pressures, slowing demand and taxes and regulations.

The Bank of Canada also released its survey of consumers, which showed perceptions about financial well-being improved modestly in the third quarter. Spending plans also improved, driven by wealthier consumers such as homeowners and older people, the survey found. For less wealthy individuals, including young people and those whose highest level of education is high school, spending intentions declined.

Consumers also saw a deterioration in the labour market during the third quarter, coinciding with a steady increase in the unemployment rate. The decline in job-finding prospects was particularly sharp for public-sector workers, as the federal government undergoes a spending review.

Meanwhile, most consumers expect the worst impacts of the trade war on the economy are yet to come. The survey finds about two-thirds of consumers expect Canada will enter a recession over the next 12 months, roughly the same as the previous quarter, but significantly higher than compared to before the trade conflict with the U.S. began.

“The Bank of Canada’s business and consumer surveys continued paint a downbeat picture of the economy, with only marginal improvement in some indicators relative to the prior quarter,” Andrew Grantham, economist at Canadian Imperial Bank of Commerce, said in a report to investors.

“With the surveys also suggesting that inflation expectations are relatively well contained, today’s data provides further support for another 25 basis point rate cut from the Bank of Canada next week.”

Consumers also think the ongoing trade dispute will fuel inflationary pressures. The survey shows consumers’ inflation expectations in the short run remained above pre-pandemic averages, while longer-term inflation expectations also rose.

Canadians’ inflation expectations for vehicles, which face U.S. tariffs, rose significantly in the third quarter, remaining comparable to levels seen after the Covid-19 pandemic when supply chain problems drove up prices.

The survey shows consumers continue to prioritize Canadian-made goods and domestic vacations over American ones. Nearly 60% of respondents said they were spending more on goods made in Canada, while 62% said they’re spending less on U.S. goods. About a third of respondents said they’re spending more on Canadian vacations and 53% said they’re spending less on vacations in the U.S.

–With assistance from Mario Baker Ramirez.

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Last modified: October 20, 2025