The Bank of Canada’s Business Outlook Survey for Q1 indicates a sharp contraction in economic expectations as the US pursues trade measures. Firms are expected to raise prices in response to new import taxes from the US.
The survey shows overall sentiment has worsened, with the business survey indicator declining to -2.14 from -1.16 in Q4 2024. Additionally, 32% of Canadian firms foresee a recession within the next year, up from 15% in the previous quarter.
Economic Expectations and Rising Costs
Furthermore, 65% anticipate rising costs, while 35% plan to increase selling prices. A decrease in expected sales growth is also noted, with 28% of firms reporting a drop in sales over the past year.
Looking further ahead, 23% expect inflation to exceed 3% for the next two years, and 66.5% of Canadians predict a recession within the same time frame. Consumer expectations for five-year inflation have risen to 3.39%, compared to 2.99% in the last survey.
Tariffs are customs duties imposed on imports to support local industries. They differ from taxes, which are paid at the time of purchase, while tariffs are prepaid at the port of entry. There is debate among economists regarding their effects.
US President Donald Trump’s tariff strategy targets Mexico, China, and Canada, responsible for 42% of US imports in 2024, aiming to boost the US economy and reduce personal income taxes using tariff revenues.
This latest Business Outlook Survey from the Bank of Canada paints a strained picture: firms across the board, especially smaller and mid-sized ones, appear increasingly anxious about what’s ahead. The sharp weakening in the business survey indicator—from -1.16 to -2.14 in just one quarter—shows that confidence isn’t just waning; it’s falling off more quickly than expected. That sentiment shift isn’t abstract—these are front-line observations from decision makers taking stock of deteriorating conditions. At the root of this shift are external shocks, notably the new waves of tariffs being implemented south of the border.
The pricing pressures stemming from these import duties are already working their way into company strategies. About two-thirds of firms expect costs to go up, while a fair portion—roughly a third—plan to pass those increases on to customers. This isn’t yet a runaway inflation scenario, but it does build into something more structural. Already, 23% believe price increases will remain above 3% for the next couple of years. The public seems to agree—consumer inflation expectations have drifted up to 3.39% over five years. That’s not just noise; it matters for wage settlements, investment horizons, and borrowing costs.
Sales appear sluggish, too. Nearly a third of firms note weaker results over the past twelve months, and expectations for future growth, while not collapsing, are darker than before. Combine that with a marked spike in recession concerns—now held by nearly a third of business respondents—and the environment begins to align with a more defensive outlook across capital markets.
Trade Stress and Volatility
Meanwhile, from Washington, the US administration’s tariff-led approach is putting strategic stress on trade partners. While the White House says these duties are a means to stimulate its own production while offsetting taxes, we can’t ignore that they’re reshaping global supply chains with immediate pass-through effects on cross-border pricing. The focus isn’t only on China or Mexico; Canada’s exposure here is very direct.
When observing this environment from a risk-pricing perspective, what’s clear is that interest rate expectations, inflation risk premia, and credit spreads should not be treated as static. The tariff environment, combined with softening expectations among Canadian firms, hints at more volatility—and quite possibly a broader repricing. Yield curves may show flattening, especially at the long end, if recession talk solidifies into action.
From where we sit, monitoring pricing dynamics, inflation break-evens, and high-frequency data over the next few weeks becomes critical. If inflation expectations continue to rise while growth slips, the expected policy path becomes murkier. That ambiguity—especially on rate cuts or pauses—will feed directly into implied volatility. Layers of uncertainty like this can create asymmetric risk opportunities when read alongside positioning data and open interest, particularly in macro-driven options markets.
In times like these, we find it necessary to weigh both the headline data and the subcomponents: rising costs, pricing pressure, and subdued investment intent. All of it converges into a fresh calibration of business risk outlooks—especially for contracts sensitive to growth momentum and inflation persistence. We’re logging not just a statistical shift, but a behavioural one.
