Tariff Uncertainty Clouds Business Confidence
In the second quarter of 2025, Canadian businesses continue to grapple with uncertainty surrounding tariffs, particularly in relation to trade tensions with the United States. According to the Bank of Canada's latest Business Outlook Survey, released on July 21, business sentiment remains subdued despite a slight improvement from the sharp declines observed in March and April. The survey highlights that while fears of a worst-case trade scenario have diminished, many firms are still cautious, with 28 percent anticipating a recession within the next year, down from 32 percent in the first quarter but significantly higher than the 15 percent reported over the previous two quarters.
The impact of tariffs is evident in firms' reluctance to expand, as many are holding back on hiring and investment plans. The survey notes that competition and weak demand are limiting businesses' ability to pass on increased costs to customers, adding further pressure to their operations. Despite these challenges, there are glimmers of hope, particularly among exporters, as fewer companies report being directly affected by the current tariffs compared to earlier expectations.
Consumer Sentiment and Inflation Expectations Shift
Alongside business concerns, consumer confidence in Canada is also taking a hit due to tariff-related uncertainty and rising cost-of-living pressures. The Canadian Survey of Consumer Expectations for the second quarter of 2025 indicates that consumers are increasingly pessimistic about their financial health and the labor market. This has led to more cautious spending plans, a stark contrast to the gradual improvements seen in previous quarters.
On the inflation front, businesses' short-term expectations have returned to levels observed at the end of 2024, according to the Bank of Canada. Earlier fears that widespread tariffs would drive up costs and trigger higher selling prices have somewhat eased, though specific sectors like steel, aluminum, and automobiles continue to feel the brunt of trade restrictions. The central bank notes that while economic indicators remain fragile, the reduced likelihood of extreme trade disruptions has provided a small measure of relief.
Looking Ahead: Cautious Optimism Amid Challenges
Despite the ongoing challenges, the Bank of Canada's reports suggest a cautious optimism among some sectors. The improvement in export outlooks, driven by fewer firms being directly impacted by tariffs, offers a potential bright spot for the Canadian economy. However, with two-thirds of consumers still expecting a recession within the next year and businesses slowing hiring and investment, the road to recovery remains uncertain.
The Bank of Canada continues to monitor these developments closely, maintaining its key interest rate at 2.75 percent as it balances inflation risks and trade uncertainties. As firms and consumers alike navigate this complex landscape, the central bank's surveys underscore the importance of resolving trade conflicts to restore confidence and stability in Canada's economic future.