What's driving cautious optimism this quarter?
The Bank of Canada’s second-quarter 2025 Business Outlook Survey revealed that while Canadian businesses have grown less fearful of worst-case trade scenarios, tariffs and persistent uncertainty continue to cloud economic prospects. The survey, conducted in May, showed that although some tariff impacts on costs and sales have materialized, expectations of further negative fallout have moderated.
The Bank noted, “Tariffs and related uncertainty, along with spillover effects on the Canadian and global economies, continue to have major impacts on businesses’ outlooks. However, the worst-case scenarios that firms envisioned last quarter are now seen as less likely to occur.”
Muted sales and investment expectations
Sales expectations remained subdued, largely due to weak demand across sectors. Exporters, however, expressed slightly improved confidence, with fewer reporting direct tariff impacts. The Bank highlighted that while indicators of future sales softened, the decline was less severe than feared, as “most exporters… reported not currently being subject to tariffs.”
Investment intentions also stayed cautious. Firms largely prioritized maintenance over expansion, constrained by uncertainty and sufficient existing capacity. According to the Bank, businesses cited soft demand, ongoing uncertainty, and lack of capacity pressure as key reasons for holding back investment. The share of firms facing labour shortages dropped, and most planned to maintain current staffing levels.
Cost pressures and inflation expectations stabilize
Tariff-related costs continue to squeeze profit margins. Roughly half of firms surveyed reported facing higher input costs due to tariffs and supply chain adjustments. However, competitive pressures and weak demand limited their ability to pass these costs on to customers.
The Bank observed that while businesses expect input price growth to accelerate modestly over the next year, selling price expectations remained stable. Inflation expectations, which spiked last quarter, returned to late-2024 levels. “Tariffs are the primary driver of inflation expectations,” the Bank said, but slower demand appeared to be tempering broader price pressures.
Uncertainty remains a central theme
Reacting ot the survey, Bank of Montreal (BMO) noted that uncertainty—though less severe post the US–China trade truce—remained elevated. The survey’s indicator softened to -2.42, extending its 10-quarter streak in negative territory.
The BMO report pointed out that while near-term inflation expectations improved, pressures on input prices and tight credit conditions persisted. Wage expectations continued to moderate alongside a soft hiring climate.
While tariff fears have eased slightly, Canadian businesses remain cautious, balancing cost pressures and subdued demand in a still-uncertain economic environment.
What are your thoughts on how Canadian businesses are adapting to ongoing trade uncertainties? Share your insights in the comments below.
