The Bank of Canada's Business Outlook Survey results for the first quarter of 2025 reveal a decline in business sentiment amid uncertainty, primarily due to shifting US trade policies. Conducted between February 6 and 26, 2025, the survey included in-person, video, and phone interviews with business leaders.
The survey indicates widespread uncertainty, with fewer businesses expecting sales growth in the coming year compared to the last quarter. The increased uncertainty has caused many businesses to postpone key decisions related to investment and hiring. There is a consensus among firms that tariffs would raise costs, leading to increases in selling prices.
The Business Outlook Survey indicator, a measure of the results from key questions in the survey, has declined, with reduced optimism about employment, investment, and future sales. Despite these challenges, expectations for input price increases have risen, driven by tariff concerns.
Around 32% of firms plan for a possible recession in Canada over the coming year, doubling from 15% in previous quarters. Business sentiment has deteriorated, especially among exporters.
In the context of the trade conflict, sales expectations have softened, particularly among exporters who anticipate a slowdown due to US tariffs making Canadian goods more expensive. While some firms cite logistical challenges in finding non-US customers, others rely on strong domestic sentiment to offset some negative impacts of US tariffs.
Firms have paused their capacity expansion plans due to weak demand, reporting ample capacity to meet current needs. Investment intentions have decreased sharply due to tariff-related uncertainty. This trend is noticeable among exporting firms and in sectors like manufacturing. While costs for capital goods have risen due to the Canadian dollar's depreciation, some investment projects focusing on capacity maintenance or productivity improvements persist.
Hiring plans are also on hold, with employment intentions at a low compared to the pandemic period. Wage growth expectations have eased due to continued low inflation and demand, though some firms continue to issue larger-than-normal wage increases due to delayed union agreements.
The threat of tariffs is putting upward pressure on price expectations, with two-thirds of firms expecting increased non-labor input costs. Most firms are prepared to raise selling prices if tariffs are imposed. This change in expectations is a result of the Canadian dollar's depreciation and shifts in supplier relationships.
Exporting firms have mixed expectations regarding who will bear the cost of US tariffs, with some firms attempting to shift focus to international markets. Near-term inflation expectations have increased, driven by concerns over tariffs, despite reduced pressure from weak demand.
Firms place diverse probabilities on the likelihood and duration of tariffs, which influences their strategic planning. During February’s survey interviews, 30% of firms had factored tariffs into their projections.
The Business Outlook Survey reflects opinions of respondents and does not necessarily embody the Bank of Canada's views. Survey information is gathered from about 100 firms, representing Canada's GDP composition.