Firms began to breathe easier before another energy shock hit
Canadian businesses entered 2026 in a better mood than a year earlier, even as the Bank of Canada’s flagship survey was quickly overtaken by the war in Iran and a renewed oil shock.
The Bank of Canada’s first‑quarter Business Outlook Survey, conducted from February 5 to 25, showed overall sentiment has recovered to levels similar to those before the US trade conflict.
The share of firms “planning or budgeting for a recession in Canada over the next 12 months” dropped from 22% to 9%, “the lowest level since the series began in 2023,” according to the survey.
“Compared with recent quarters, fewer businesses reported impacts on their expected sales or costs,” the report said, as trade tensions with the United States weighed less heavily on corporate plans.
“More firms than in recent quarters are focusing investments on increasing productivity and expanding their capacity, while fewer are focusing on routine maintenance,” the survey said.
Nearly half of firms anticipate hiring more staff over the next year, although most staffing increases are expected to be modest.
RBC senior economist Claire Fan characterized the picture as a “healthy rebound,” with BoC data showing that “most firms’ outlooks for sales, investment, and employment were roughly unchanged between February and March.”
Iran conflict pushed input costs and inflation expectations higher
That picture shifted once the Iran war began on February 28. In follow‑up calls with 20 heavily exposed businesses in March, the central bank found that “most businesses had revised up their expectations for input prices, mentioning specifically fuel, freight, fertilizers and exchange rates.”
Firms in agriculture, oil and gas, manufacturing and transportation have “already experienced increases in their input prices,” while others expect to see higher costs as suppliers pass them through.
Economists at RBC Economics judged that higher oil prices are likely to deliver only “limited second‑round effects on non‑energy consumer inflation in Canada this year,” assuming prices do not remain elevated for too long.
TD Economics’ Andrew Hencic similarly assessed that, before the shock, “business indicators had ticked higher, with productivity and output‑raising investment intentions moving higher,” but warned that weaker consumer demand leaves little room for firms to pass on higher costs.
The bank’s companion Canadian Survey of Consumer Expectations, also run in February with follow‑ups into early April, showed sentiment that remained below its pre‑pandemic average.
High living costs and job‑loss worries, including in sectors exposed to artificial intelligence, continued to restrain household spending.
Broader cost pressures are building in the background
Outside the Bank of Canada’s work, other indicators pointed to rising cost pressures even before the latest conflict.
The Canadian Federation of Independent Business reported last month that the share of small firms citing fuel as a major cost concern jumped from 36% in February to 50% in March.
Bank of Canada governor Tiff Macklem said he is not overly concerned about a near‑term spike in inflation expectations tied to the war, stressing that medium‑ and long‑term expectations remain between 2.5% and 3%.
Headline CPI rose to 2.4% year over year from 1.8% in February, powered by a record monthly surge in gasoline prices
Meanwhile, a PwC report on deepening Canadian CEO pessimism highlighted how business confidence has been fragile even before the latest conflict, with the BoC’s survey already showing subdued demand and cautious hiring among large corporates.
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