Bank of Canada Business Outlook Survey and Canadian Survey of Consumer Expectations (2026 Q1)

Canadian business and consumer sentiment improved prior to energy shock

Business sentiment

• The Bank of Canada’s Business Outlook Survey (BOS) was conducted prior to the outbreak of the current conflict with Iran (between Feb. 5th and Feb. 25th), with follow up calls with a subset of participants between March 18th and 27th to gauge the impacts of the conflict. 
• The overall indicator improved modestly in Q1, returning to levels like those prior to the U.S. trade conflict. The share of firms planning or budgeting for a recession over the next 12 months fell sharply to 9%, the lowest reading since the series began in 2023. 
• Firms’ expectations for future sales improved for a third consecutive quarter and returned to their historical average, supported by fading trade‑related uncertainty and stronger public spending, particularly on infrastructure and defence. 
• Importantly, investment intentions strengthened for a second straight quarter and moved above their long‑term average, with firms increasingly prioritizing capacity expansion and productivity‑enhancing investments rather than routine maintenance. 
• Hiring intentions recovered from weak levels and are now near their historical average, with nearly half of firms planning to add staff, although most increases are expected to be small. The share of firms planning outright staff reductions declined to below its historical average. 
• Wage growth expectations were broadly unchanged, with firms anticipating average wage growth of around 3.5% over the next year, reflecting weaker business performance, smaller cost‑of‑living adjustments, and expectations that wage growth will slow relative to the past 12 months. 
• Firms expect average‑sized increases in both input and output prices, with pre‑war survey results pointing to stable price growth over the next year. However, follow‑up calls indicate rising energy, fertilizer and freight‑related input costs following the outbreak of war in the Middle East. Moreover, the follow up calls showed firms facing barriers to raising prices (like weak demand, constrained consumer budgets and limited pricing power) leading to partial pass-through of higher costs. One‑year inflation expectations ticked up slightly in March, driven by higher energy prices, while five‑year inflation expectations remained broadly stable between 2.5% and 3%, little changed from last quarter.

Consumer sentiment 

• The Bank of Canada’s Canadian Survey of Consumer Expectations (CSCE) was conducted between February 5th and 25th, with follow up interviews between February 24th and March 2nd and a "special survey between March 26th and April 2nd focused on how the war in the Middle East was affecting consumer's views and behaviours".  
• The CSCE indicator rose slightly in Q1, but it remains below its pre‑pandemic average. Sentiment is still weighed down by high prices and economic uncertainty despite easing in trade‑related pressures. 
• The improvement was driven mainly by reduced drag from U.S. trade tensions, which lifted sentiment among workers in trade‑sensitive sectors.  
• Spending intentions remained muted but became less negative relative to Q4, particularly among workers most exposed to trade uncertainty. However, high living costs, elevated prices for goods and services, and ongoing economic uncertainty continue to restrain spending. 
• The labour market index changed little and remains well below pre‑pandemic levels. The slight deterioration this quarter was driven by a rise in perceived job‑loss risk, including among public sector workers and in sectors more exposed to artificial intelligence. 
• Prior to the war, longer‑term inflation expectations edged down slightly from Q4, below the survey’s pre‑pandemic peak. Short‑term inflation expectations were little changed and remain above the historical average. Follow-up surveys conducted after the start of the war show consumers expect the duration of the conflict to be a key driver of food and gasoline prices over the next twelve months. Among respondents, 21% had reported postponing trips and 28% had reduced or postponed major spending.

Key Implications

• The results from the surveys are muddied by the outbreak of the conflict in the Middle East coming after the original survey periods. The Bank of Canada conducted follow-up surveys of some participants to see how expectations had evolved in light of the shock – and not unexpectedly inflation expectations were higher.  The good news is that the picture of the economy prior to the shock was one of some gaining momentum. Business indicators had ticked higher, with productivity and output raising investment intentions moving higher, and trade related hesitancy fading.   
• On the consumer side, spending intentions and the labour market indicator were weak. This is broadly consistent with what the economic data have shown over the past few months, and a sign that there is some excess supply in the economy. This is consistent with messaging from firms where weak demand and hesitant consumers limiting the opportunity to raise prices.

Disclaimer

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