According to the Bank of Canada, overall business sentiment has deteriorated after improving over the past three quarters, it noted Monday in its latest Business Outlook Survey for the second quarter of this year.
The report said:
- Sales outlooks have softened slightly, reflecting a slowdown in business and consumer spending associated with rising fuel-related costs and heightened geopolitical uncertainty in the Middle East.
- Firms’ export outlooks have improved. Fewer firms said trade uncertainty and hesitancy among US customers are constraining exports, and more firms reported strong demand for commodity exports.
- Most firms did not report binding capacity constraints or labour shortages. Reports of difficulties sourcing critical inputs increased this quarter, but these were generally not viewed as limiting firms’ ability to meet demand.
- Firms’ investment intentions remain strong. Soft demand and lingering uncertainty continue to weigh on investment plans for some, while elevated commodity prices are supporting plans for others. In the oil sector, higher oil prices are prompting producers to increase both production and investment. Firms’ employment intentions are weaker than the historical average.
- The share of firms expecting their input and selling prices to increase rose markedly, with expected price increases often linked to high global oil prices.
- Expectations for elevated oil prices have driven an increase in firms’ inflation expectations relative to recent quarters. However, most recently, inflation expectations have declined, with the lowest expectations of the quarter recorded in the period after the signing in mid-June of the interim agreement between the United States and Iran to end the war in the Middle East.
Also on Monday, the Bank released its Canadian Survey of Consumer Expectations—Second Quarter of 2026.
Key Findings:
- A slightly larger share of consumers than in the previous quarter expect inflation to be above 3% over the next 12 months. Moreover, two- and five-year-ahead inflation expectations edged up. While tariffs were still the most frequently cited driver of inflation, mentions of energy prices rose sharply from the previous quarter.
- Concerns about high prices and economic uncertainty are still holding back consumer spending plans. Spending expectations are weaker among households that believe the war in the Middle East will significantly raise inflation. These households are more likely than others to substitute for cheaper essentials, curtail discretionary spending and drive less.
- Consumers’ perceptions of the labour market improved modestly from their low levels in the previous quarter. This improvement reflected a decline in the perceived risk of losing a job, particularly among workers in sectors more exposed to trade.
“Overall, both business and consumer sentiment remained subdued in Q2. However, as with the Q1 surveys, the timing of the data collection complicates the interpretation of the results. Both surveys were completed before the de-escalation of tensions between the U.S. and Iran and the subsequent decline in oil prices. As a result, they likely overstate the persistence of the recent energy-price shock. With oil prices having since retraced much of their earlier increase, sentiment should gradually resume its improving trend over the second half of the year. The most encouraging nugget from the BOS was that firms’ investment intentions remained elevated, despite the uncertain backdrop,” said Maria Solovieiva,, Economist, TD.
“From the Bank of Canada’s perspective, inflation expectations remain the key takeaway. The rise in short-term inflation expectations was unsurprising given the temporary increase in gasoline prices. Longer-term business inflation expectations remained well anchored, while longer-term consumer inflation expectations edged higher but remained below their levels a year ago. Taken together, the surveys suggest that the recent energy-price shock is unlikely to generate persistent inflationary pressures, reinforcing the case for the Bank to remain on hold at next week’s policy meeting.”
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