Bank of Canada Business Outlook Survey and Canadian Survey of Consumer Expectations (2025 Q1)

Canadian business and consumer sentiment faltered in Q1 2025.

• According to the Bank of Canada Business Outlook Survey (BOS), Canadian business sentiment dropped almost a full point in the first quarter of 2025 (to -2.14), reversing five consecutive quarters of improvement.
• The survey was conducted between February 6 and 26, 2025, during a volatile stretch, marked by the announcement and temporary pause of U.S. blanket tariffs on Canadian goods, followed by announcements of Canada's phase 1 retaliatory tariffs. However, it predates the announcements of U.S. steel and aluminum tariffs and new tariffs on auto imports, suggesting it may understate the full extent of the tariff threat. 
• Expectations for recession have risen, with 32% of firms now operating under the assumption that Canada will enter an economic contraction over the next year. 
• Expectations for future sales, while still stronger than a year ago, fell 18 points relative to last quarter. The drop was largely driven by the 40% of firms that have already incorporated tariff impacts into their outlook. 
• Investment intentions saw the steepest decline, plunging by 29 points – erasing nearly all progress made in recent quarters. The pullback was most pronounced among manufacturing exporters, while firms in the oil & gas sector indicated that they plan to maintain current investment levels.
• Employment intentions also deteriorated sharply. The balance of opinion fell below the pandemic level, driven by a historically low share of firms planning to hire over the coming year.
• Wage pressures continued to ease, but remain above historical average, still reflecting the effects of past union negotiations.
• Firms no longer expect input price inflation to ease, with two-thirds of the respondents now anticipating higher input costs due to tariffs. Price expectations were also affected by the recent depreciation of the Canadian dollar.
• According to the parallel Canadian Survey of Consumer Expectations (CSCE), consumers' sentiment also weakened.
• Echoing the BOS, the share of consumers expecting recession jumped to 67% from 47% last quarter. This shift in outlook has raised concerns about job security. Respondents report a greater than 20% probability of losing their job with the next year, even higher than at the height of the pandemic.
• As a result, consumer spending plans have become more pessimistic. A growing share of consumers are planning to reduce spending, citing economic uncertainty as the major driver. Elevated housing costs and persistently high prices for goods and services are also weighing on future spending plans.
• Consumers’ short-term inflation expectations rose this quarter for the first time since 2022. Longer-term inflation expectations edged up slightly but remain around their pre pandemic levels.      

Key Implications

• Both business and consumers lost confidence in the first quarter of this year, as U.S. tariff threats raised serious concerns about future economic prospects. On the business side, based on historical relationships, today's drop in future sales expectations and the sizeable reduction in investment intentions point to a much weaker outlook than in our recent forecast for Q1 2025.
• With about one third of firms and two-thirds of consumers now expecting a recession and job loss fears surpassing pandemic levels, businesses and consumers are shifting in defensive mode. The pullback in consumer spending, which makes up 60% of GDP, will add to the drag from weaker investment spending, though the full effect of tariffs and related uncertainty is unlikely to materialize until Q2. One thing the Bank of Canada will be watching closely is inflation expectations. Despite the rise in short-term inflation expectations now, there is no evidence of a sharp rise in longer-term views, leaving the door open for another cut in April.

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