Released yesterday, the latest results from the Bank of Canada’s Business Outlook Survey* show that business sentiment in Canada has deteriorated. Three things stand out among the findings:

1. The overall outlook is weaker

It’s not the lowest it has ever been, but the Business Outlook Survey (BOS) indicator—a summary measure of the survey results—decreased in the first quarter. About a third (32%) of firms are assuming a recession will occur in Canada over the coming year, up from 15% over the past two quarters. The survey was conducted in February when a blanket 25% U.S. tariff on Canadian goods (10% on energy) was “on pause.”

*The Q1 Business Outlook Survey was conducted with the senior management of about 100 firms from February 6 to 26, 2025. The Business Leaders’ Pulse is conducted online every month; the latest results are from January, February and March 2025.

2. Hiring intentions are weaker

Hiring intentions were at their lowest level since the last quarter of 2015. Although more firms in the survey were planning to increase rather than decrease their staffing levels, the reduced demand for workers across the broader Canadian economy translated into a 33K decline in national employment in March.

3. Inflation is expected to increase

For the first time since the second quarter of 2022, more firms were expecting their input and output prices to increase rather than go down (see the chart below). At the same time, near-term inflation expectations spiked with firms pegging the annual inflation rate at 3.6% one year from now. Longer-term inflation expectations, however, remain within the Bank of Canada’s target range at 2.5% five years from now.

The first quarter results point to a business sector that is anxious about the challenges associated with a trade war. This anxiety has been having a real impact on hiring decisions and inflation expectations.

Canada largely dodged the reciprocal tariffs announced last week, but it is still dealing with U.S. tariffs on steel and aluminum, vehicles, and lumber; Chinese tariffs on canola oil and cake, peas, pork and seafood; and the Canadian countertariffs. At the same time, the widening of the trade war will dampen global growth. As a result, we expect business sentiment to remain weighed down by the trade war and ongoing uncertainty.

In terms of what the Q1 results mean for monetary policy, the survey results provide more evidence of an economy in need of the stimulus provided by more interest rate cuts, but they also raise the spectre of rising inflation. We still expect the Bank to look through short-term price pressures to focus on growth with a 25-basis point cut now looking more likely at the April 16 meeting with others to follow.

Answer to the previous trivia question: The last time the West Texas Intermediate price benchmark posted a monthly average below US$50 per barrel was December 2020.

Today’s trivia question: What is the term for a country that seeks self-sufficiency?