Key facts
- Canadian businesses' inflation expectations decreased following a Middle East ceasefire.
- Trade worries among Canadian firms have also subsided.
- A Bank of Canada survey indicated that concerns about high gasoline prices impacting demand were present in May.
- The business outlook indicator fell to -0.39, marking the first decline in three quarters.
- Firms reported increased caution due to US trade policy uncertainty, though fears have eased.
- Employment intentions weakened, and businesses noted spare capacity.
Canadian businesses have reduced their expectations for high inflation and eased concerns about trade following a ceasefire in the Middle East, according to a Bank of Canada survey. The findings, released on Monday, offer insights into business sentiment ahead of the central bank's next interest rate decision.
The survey, conducted in May before a US-Iran interim agreement, revealed that firms were worried about high gasoline prices impacting demand. However, a follow-up assessment showed these concerns were abating, with inflation expectations declining after the mid-June agreement.
The conflict in Iran reversed a three-quarter trend of improving business sentiment. The proportion of firms planning or budgeting for a recession in Canada over the next 12 months rose to 17% from 9%. The business outlook indicator, measuring prospects under current economic conditions, dropped to -0.39, its first decline in three quarters, though it remains significantly higher than the -2.41 recorded a year ago.
The Bank of Canada is introducing new indicators to better understand economic shocks. The activity indicator decreased, largely due to a weaker sales outlook, while the price indicator rose, reflecting expectations of higher inflation and increased input costs. Firms also reported continued caution due to uncertainty over US tariffs and trade tensions, although worst-case fears have eased, particularly concerning exports. Fewer businesses indicated that US customers were holding back on orders due to trade policy uncertainty. Investment intentions remained high, primarily driven by domestic demand for routine maintenance. Employment intentions weakened, and firms continued to report spare capacity.