Businesses downbeat but less worried about worst-case tariff scenario, Bank of Canada surveys find

Globe and Mail

21-07-2025

U.S. President Donald Trump's erratic trade policy has put a chill on Canadian businesses and consumers, but fewer are expecting a worst-case tariff scenario, according to a pair of surveys published by the Bank of Canada on Monday.
The quarterly pulse checks, conducted in late April and May, captured the sour mood across Canada as Mr. Trump rolled out waves of tariffs through the spring and early summer.
Canadian companies said they're curtailing investment and hiring, and eating higher tariff-related costs because of weak consumer demand. Consumers said they are worried about their jobs and are delaying big purchases.
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At the same time, the surveys found a sense of relief that U.S. tariffs have not bitten as hard as many feared earlier in the year when Mr. Trump was threatening across-the-board tariffs, without the exemptions that were later introduced.
'Fewer businesses are considering extremely negative scenarios in their planning,' the Bank of Canada said.
This hint of optimism reinforces expectations that the central bank will hold interest rates steady for the third-consecutive time when it meets next week.
After a string of better-than-expected economic data in recent weeks, financial markets are pricing a nearly 90-per-cent chance that the bank will keep its policy rate at 2.75 per cent next Wednesday, according to LSEG Data & Analytics.
What happens to monetary policy going forward depends a lot on how the trade war unfolds – both the outcome of Ottawa's trade negotiations with Washington, and how tariffs end up feeding through Canada's economy and influencing business pricing decisions and consumer behaviour.
Given the rapidly changing trade environment, the two Bank of Canada surveys are already dated. Since May, Mr. Trump has doubled tariffs on steel and aluminum to 50 per cent and threatened to increase tariffs on goods that don't meet free-trade-agreement rules to 35 per cent from 25 per cent. Last week, Prime Minister Mark Carney acknowledged that U.S. tariffs probably aren't going to zero, even if Ottawa can secure some reprieve.
That said, the surveys highlight several dynamics that could inform where interest rates go from here.
So far, U.S. tariffs and Canadian countertariffs haven't had a major impact on Consumer Price Index inflation, which came in at 1.9 per cent in June – below the central bank's 2-per-cent target.
The business survey suggested that companies are having trouble raising prices. Around half of the respondents said they're facing cost pressures related to tariffs and changes to their supply chains. However, 'competitive pressures and the current weakness in demand are limiting firms' ability to pass on these costs to customers,' the Bank of Canada said.
'As a result, many businesses expect their selling prices to increase over the coming year at a similar rate as they did over the past year. Because customers are sensitive to price increases, many firms are absorbing a portion of these increased costs, compressing their profit margins in an effort to preserve market share,' the bank said.
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Having spiked dramatically in the first quarter, business and consumer expectations about future inflation remain elevated, although they did level off somewhat in the second quarter.
'Worries about tariff passthrough and inflation expectations were the reasons that the Bank of Canada held rates back in June, but those look less concerning in these surveys,' Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients.
'While central bankers probably won't ease monetary policy next week, there is ample scope for them to resume their cutting cycle later in the year should the economy continue to stagnate,' he wrote.
Both Bank of Canada surveys had notes of pessimism and optimism. The share of companies planning for a recession declined to 28 per cent from 32 per cent in the first quarter, and the number of companies that expected higher tariff-related costs dropped to one-third from two-thirds.
That said, more companies reported that leading indicators, such as order books and sales inquiries, have deteriorated, and hiring and investment intentions remain weak.
The consumer survey found that concerns about job security have eased somewhat since the first quarter. But fears of job losses remain elevated, and consumers are becoming increasingly cautious about spending on non-discretionary items.
Bradley Saunders, North America economist at Capital Economics, said in a note to clients that the surveys may appear overly downbeat given when they were conducted.
'Bleak sales and spending intentions captured by the Bank of Canada's second-quarter business and consumer surveys are consistent with a sharp downturn in GDP growth,' he said.
'However, the surveys were carried out at a time of peak tariff uncertainty. Since then, the timelier monthly business and consumer surveys generally suggest that sentiment has improved as tariff escalation threats have receded.'