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Spanning early August to early September, most information in the Q3 Bank of Canada Business Outlook Survey was gathered during a period of elevated but moderately stabilizing global trade tensions.
Overall, the details aligned with our expectations—economic growth showed signs of stabilizing in Q3, but remained at weak levels that will limit upside inflation risks. While this week’s Canadian CPI inflation data will be closely watched, available information supports another BoC rate cut next week.
In Q3, businesses’ sales outlook remained subdued and recessionary concerns persisted. Most reported weak demand and abundant capacity, which combined led persistently soft hiring and investment plans. Businesses in the steel and aluminum industry and agriculture industry held especially soft outlook, after being targeted with U.S. and Chinese tariffs.
Still, there were some silver linings in the details. For one, retailers reported improved consumer spending in Q3, consistent with strength observed in our RBC card purchase data. Additionally, most surveyed exporters continued to report that their exports were not subject to tariffs, an expected outcome given CUSMA exemptions that protect the bulk of exports to the U.S.
However, duty-free access offers little consolation if total exports continue contracting due to weaker U.S. and global demand—which is what exporting businesses expected in Q3.
Few firms struggled with capacity constraints, and most reported no issues ramping up production to meet unexpected demand increases. Labour shortages were similarly absent, reflecting slack that has accumulated in the labour market over the past year. Canada’s unemployment rate in September was 0.5 percentage points higher than a year ago, with most of the increase driven by new labour market entrants unable to find work rather than layoffs.
Looking ahead, hiring and investment intentions remained soft. Most businesses also anticipated difficulty passing cost increases to customers and expected input price growth to keep outpacing selling price growth over the next year. Near-term Inflation expectations eased to 3% while 2 to 5-year expectations remained broadly unchanged at 2 ½%.
The Bank of Canada pointed out “the large majority of interviews were conducted before the announcement of the removal of certain Canadian counter-tariffs.” However, our expectation was that the counter-tariffs would have had minimal impact on the inflation outlook regardless.
Overall, we continue to expect another BoC rate cut next week.Soft demand and inflation outlook from today’s survey results should leave the BoC ample room to cut rates again. Beyond the next meeting however, we expect the central bank will start factoring in possibility of larger-than-expected fiscal tailwinds, pending details to be unveiled at the fall budget on November 4.
About the Author
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.
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