Author: Erik Hertzberg and Nojoud Al Mallees
(Bloomberg) — Businesses remain concerned that the ongoing trade war will constrain their sales, a Bank of Canada survey of businesses shows, even as their expectations for inflation eased.
The central bank’s business outlook index rose slightly to -2.3 in the third quarter, up from -2.4 previously. The bank said that while the situation was “gradually improving”, business prospects and intentions “remain subdued”.
“Domestic export sales growth expectations remain weak amid concerns about the broader economic impact of trade tensions,” the bank said in a report released on Monday.
Businesses no longer expect sales growth to strengthen. Policymakers said they spoke with exporters in the steel and aluminum industries hit by tariffs, which reported “particularly weak prospects.” The companies also said the levy “resulted in significant layoffs.”
Business concerns about inflation have eased, with their expectations for the consumer price index for the coming year falling below peaks reached earlier in the trade conflict.
Meanwhile, businesses expect costs to rise due to trade uncertainty and tariffs, although they reiterated that weak demand limits their ability to pass on higher costs to consumers.
The combined evidence of tariff damage, uncertainty and easing inflation expectations point to an increasingly oversupplied economy and suggest officials may be more willing to cut borrowing costs. The Bank of Canada’s benchmark overnight rate is currently at 2.5%, with policymakers set to set the rate on October 29.
The market is increasingly expecting a 25 percentage point rate cut at this meeting, with overnight swap traders firming up their bets to close to 80% after the meeting. The central bank has dismissed concerns about rising core inflation measures, with Governor Steve McClam reiterating that he sees both the labor market and economic growth as “soft.”
Businesses also reported reduced capacity constraints and labor shortages fell to their lowest levels since 2020, the bank said. Business investment intentions remain weak, with most companies saying their spending is to replace or repair machinery and equipment.
When businesses were asked about their most pressing concerns, uncertainty was the most frequently cited response, followed by cost pressures, slowing demand, and tax and regulation.
The Bank of Canada also released a consumer survey that showed a slight improvement in views of financial conditions in the third quarter. Spending plans also improved, driven by affluent consumers such as homeowners and seniors, the survey found. For the less affluent, including young people and those with high school degrees, willingness to spend declined.
Consumers also saw the labor market deteriorate in the third quarter, with unemployment rising steadily. Employment prospects for public sector workers have fallen particularly hard as the federal government undergoes a spending review.
At the same time, most consumers expect the worst economic impact of the trade war is yet to come. The survey found that about two-thirds of consumers expect Canada to fall into recession within the next 12 months, about the same as last quarter but significantly higher than before the trade conflict with the United States began.
“The Bank of Canada’s business and consumer surveys continue to paint a bleak economic outlook, with some indicators improving only slightly compared with the previous quarter,” Canadian Imperial Bank of Commerce economist Andrew Grantham said in a note to investors.
“The survey also suggests that inflation expectations are relatively well controlled, with today’s data providing further support for another 25 basis point rate cut by the Bank of Canada next week.”
Consumers also believe the ongoing trade dispute will add to inflationary pressures. Surveys show that consumers’ short-term inflation expectations remain higher than the pre-pandemic average, while long-term inflation expectations have also increased.
Canadians’ inflation expectations for cars facing U.S. tariffs rose sharply in the third quarter, matching levels seen in the wake of the Covid-19 pandemic when supply chain issues pushed up prices.
Surveys show consumers still prioritize Canadian-made goods and domestic vacations over the United States. Nearly 60% of respondents said they were spending more on Canadian-made goods, while 62% said they were spending less on U.S. goods. About a third of respondents said they were spending more on vacations in Canada, and 53% said they were spending less on vacations in the U.S.
—With help from Mario Baker Ramirez.
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Last modified: October 20, 2025
