Bank of Canada Business Outlook Survey and Canadian Survey of Consumer Expectations (2025 Q2)

Canadian business and consumer sentiment remains subdued in Q2 2025

Business sentiment

• The Bank of Canada Business Outlook Survey (BOS) overall indicator fell by 0.30 points to -2.42 even as fewer firms expect the worst-case scenario to materialize. The share of businesses anticipating a recession has declined to 28%, down from 32% last quarter. 
• The biggest driver of the weaker BOS indicator was sales expectations, with the balance of opinion turning negative in Q2. That said, firms' outlook for exports sales improved - except among those in the manufacturing and auto-related sectors.
• Investment intentions recovered slightly after a sharp drop in Q1, though they remain below their long-term average. 
• Hiring plans also recovered modestly, though the balance of opinion remains below pandemic-era levels. Fewer firms now expect tariffs to weigh on their hiring plans.
• Wage pressures continued to ease, approaching pre-pandemic norms.
• Cost pressures remain widespread, with roughly half of respondents anticipating higher input costs due to tariffs. Near-term inflation expectations retreated back to late-2024 levels, while longer-term ones edged higher.

Consumer sentiment 

• The Bank introduced a new CSCE indicator that summarizes consumer sentiment across three underlying indexes - financial health, labour market conditions and consumer spending intentions. Together, they capture key drivers of how Canadians perceive and respond to economic conditions. 
• The new CSCE indicator declined for the second consecutive quarter in Q2.
• The main source of weakness was the consumer spending index, which dropped to -0.43 from -0.21 driven mainly by expectations of higher prices. 
  • Despite these concerns, support for Canadian-made goods continues to grow. Sixty percent of respondents now say they plan to buy Canadian, up from 55% in Q1.
• The labour market index remained unchanged at -0.15 with the negative reading reflecting an elevated level of the perceived risk of job loss.
• The financial health index declined slightly, driven by a decline in the share of respondents expecting to be financially worse off over the next 12 months.
• The share of consumers expecting recession remained elevated with roughly two-thirds expecting a downturn.
• Near-term inflation expectations remained high at above pre-pandemic averages. Longer-term inflation expectations ticked up slightly, while remaining near pre pandemic norms.

Key Implications

• Business and consumer optimism remains subdued compared to late 2024, with firms anticipating weaker sales and consumers planning to cut back spending. In this defensive environment, we maintain our view for a weak Q2. Looking ahead, any easing of trade tensions, or at least more clarity around the scope and level of tariffs, could help prevent Q2 weakness from bleeding into Q3. 
• One development that will not escape the Bank of Canada's attention is the stickiness in inflation expectations. After rising last quarter, the sustained uptick in long-term views of both businesses and consumers, coupled with strong core inflation prints, likely seals off the path to a July rate cut.

Disclaimer

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.