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The bottom line: 

The latest Bank of Canada BOS Survey reported worsened near-term sales expectations, but improved outlooks and normalizing inflation expectations among businesses in Q2. 

Conducted from early to late May, the survey covered a period of broad de-escalation in global trade tensions. Results indicated that “fewer businesses are considering extremely negative scenarios in their planning.” Significantly, most participating exporters reported they are not currently subject to tariffs.

This aligns with our analysis that critical exemptions for USMCA-compliant goods are allowing the vast majority of Canadian exports to enter the U.S. duty-free. However, businesses subject to tariffs—including steel and aluminum manufacturers and auto companies—continue to maintain softer outlooks.

Trade-related uncertainty remains elevated, hampering businesses’ hiring and investment plans. Reports of upward pressure on input costs were also common, though firms indicated limited ability to pass these costs to consumers, forcing them to absorb increases through reduced profit margins.

One-year-ahead inflation expectations among businesses eased to below 3% in June, primarily reflecting anticipated disinflationary pressures from softer demand. However, recent CPI data showed contrary trends, with readings reflecting building pressures in domestic services components.

Looking ahead, we maintain that the BoC faces an unusually high hurdle for considering additional rate cuts. The central bank must also account for increased government support, which is better suited to address concentrated weakness in trade-exposed sectors than the blunt tool of lower interest rates.

Our base-case forecast continues to project that the BoC will maintain the overnight rate at current levels going forward.

The details:

• In Q2, firms reported a net deterioration in future sales indicators compared with a year ago.

• This reflects businesses’ expectations of various factors, including generally weak consumer spending and housing activities, soft oil and gas activities stalled by low global oil prices, and a reversal of an export boom earlier this year that was primarily due to tariff front-running.

• Capacity issues remained on the backburner. The share of firms reporting challenges with meeting unexpected increases in demand was below the historical average in Q2. The share reporting labour shortages was near a record low.

• Given expectations of soft demand, reports of abundant capacity, and still-heightened trade uncertainty, most firms continued to either scale back or pause their investment plans in Q2. Hiring intentions were also subdued, although layoffs were less prevalent and mostly viewed as a last resort.

• Wage growth expectations have broadly continued to ease, although the same can’t be said about input prices, which were again expected to rise faster over the next 12 months.

• Businesses also reported difficulties passing on cost increases to consumers, citing weakness in demand as the main hurdle and margin compressions as a result.

• Near-term inflation expectations among businesses eased substantially in June to 2.9% from a recent peak of 3.7% in April. This still partly reflects soft demand expectations and the associated disinflationary effect rather than reduced trade uncertainty.

• In contrast, consumers’ near-term inflation expectations remained stubbornly high in Q2 at above 4%, as reported in the separate survey of consumer expectations.

• Longer-term business inflation expectations, including for 2 to 5 years ahead, remained somewhat well-anchored, mostly within the 2.5% – 3% range but were up slightly from a year ago.

Claire Fan is a Senior Economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.