Business Outlook Survey—First Quarter of 2025

Results of the first-quarter 2025 survey | Vol. 22.1 | April 7, 2025

The Business Outlook Survey was conducted by in-person, video and phone interviews from February 6 to 26, 2025. The Business Leaders’ Pulse is conducted online every month; the latest results are from January, February and March 2025. This quarter’s publication also includes results from Governing Council outreach as well as special consultations with businesses and industry organizations in trade-sensitive sectors. This survey and consultation period was characterized by pervasive uncertainty created by the sudden and unpredictable shifts in US trade policy.

Overview

• Business sentiment has deteriorated, and uncertainty is widespread due to the trade conflict with the United States. Firms are developing plans to mitigate the effects of tariffs on their operations but see many challenges ahead (see Box 1).
• Fewer businesses than last quarter expect sales growth to improve over the coming year. Firms reported having sufficient capacity to meet expected demand.
• In the current economic environment, many businesses are delaying important decisions, such as those related to investment and hiring, until they have a clearer outlook. Hiring intentions are weak.
• Firms no longer expect growth in their input prices to slow. Two-thirds of businesses believe that their costs would be pushed higher if widespread tariffs are implemented. As a consequence, many firms would increase their selling prices.
• Near-term inflation expectations are higher than last quarter, with firms believing the inflationary impacts from tariffs will outweigh reduced pressures from weak demand.

The trade conflict is clouding firms’ outlooks

The Business Outlook Survey (BOS) indicator—a summary measure of results from key questions in the BOS—reversed its upward trend this quarter and remains below average. This decline is due primarily to lower balances of opinion on employment, investment and measures of future sales, and, to a lesser extent, fewer significant capacity pressures (Chart 1). However, these decreases are partially offset by higher expectations for increases in input prices, with firms expecting costs to rise due to tariffs. This follows more than two years when slowing price increases contributed negatively to the BOS indicator.

Uncertainty surrounding financial, economic and political conditions remains the top concern for firms and rose sharply this quarter. In this context, 32% of firms are now planning with the assumption that a recession will occur in Canada over the coming year, up from 15% over the past two quarters. Overall, business sentiment has declined in recent months (Chart 2), and it is particularly low among exporters. Firms expressed growing concerns around:

• the ongoing trade conflict and related uncertainty
• the political environment in both the United States and Canada
• risks to consumer spending

Sales outlooks have softened, particularly for exporters

The trade conflict is weighing on firms’ sales expectations, putting a halt to recent improvements. While interest rate reductions had supported past sales growth, businesses are less optimistic about the future than they were last quarter as trade policy clouds the horizon.

Indicators of future sales (e.g., order books, advance bookings and sales inquiries) remain stronger than they were a year ago, but the balance of opinion has declined from last quarter (Chart 3, red line). This lower balance reflects recent improvements in demand being partially offset by the negative effects of trade uncertainty. Similarly, businesses still expect sales growth over the coming year, but fewer firms than last quarter anticipate it will strengthen (Chart 3, blue bars).

Around 40% of firms expect lower sales growth if tariffs are implemented (Box 1). Compared with other firms in this quarter’s BOS, those that incorporated tariffs into their outlooks had significantly weaker outlooks. These firms account for nearly all of the decline in the balance of opinion on future sales growth. However, most firms had not incorporated tariffs into their outlooks at the time of the BOS interviews. Some firms said they expect that, even without tariffs, a period of prolonged uncertainty would lower their sales growth expectations.

Businesses are concerned that the costs of tariffs could impact their sales in several ways, including:

• greater difficulty competing in US markets
• lower consumer spending
• reduced demand from business customers directly affected by tariffs

Outlooks for export sales growth are particularly weak, with firms expecting a sharp slowdown as US tariffs make Canadian goods more expensive in US markets (Chart 4). Exporting manufacturers have revised down their sales expectations for 2025 because of the risk of US tariffs. Businesses highlighted several challenges in finding non-US customers, including:

• increased transportation costs
• regulatory barriers
• limited international demand for their products

However, some firms noted a strong Buy Canadian consumer sentiment, which they believe could potentially offset some of the negative impacts of US tariffs. The extent of the anticipated decline in export sales growth also largely depends on the availability of non-Canadian substitute goods in the United States. Notably, strong demand for commodities such as oil, gas and lumber is expected to sustain export growth in the natural resource sector despite the added costs of tariffs.

Firms’ investment intentions deteriorated sharply this quarter after having strengthened over 2024 (Chart 6), with tariff uncertainty weighing heavily. Many firms have put their plans for new investment on hold, with some also scaling back existing plans. This wait-and-see approach to investment was echoed by participants in Governing Council outreach activities in Moncton and Calgary.1 The share of firms that said uncertainty is holding back investment has risen considerably (Chart 7, green line). At the same time, demand is providing little support (Chart 7, yellow line), as firms generally reported having sufficient capacity to meet current and anticipated subdued demand. The deterioration in investment plans was most pronounced for exporting firms, such as those in the manufacturing sector.

Investment plans are also restrained by the cost of imported capital goods, which has been pushed higher by the recent depreciation of the Canadian dollar. Still, many existing investment projects are going ahead—particularly those focusing on maintaining capacity or improving productivity. In the oil and gas sector, the effects from trade tensions are more limited than they are for many other exporters. Near-term production and investment are not expected to be severely impacted. But firms in this sector expressed concern that potential tariffs—even at a lower rate of 10%—would affect their financial performance and thereby make medium-term capital expenditure in the sector less attractive.

Hiring plans are also on hold. Employment intentions are at a lower level than they were at any point during the pandemic, driven by a historically low share of firms planning to hire over the coming year (Chart 8). Soft demand, tariff uncertainty and minimal capacity pressures mean few firms need to add staff. Instead, more firms than usual intend to keep their number of employees fairly flat over the coming year. Still, the share of firms planning for outright reductions in staff remains similar to previous quarters.

Wage growth expectations continue to ease (Chart 9). Firms attributed this to a sustained period of lower inflation and soft demand. Even so, for businesses participating in the BOS, wage growth expectations remain higher than the long-run average. Firms that are still giving larger-than-normal wage increases often said a lingering source of upward pressure is union agreements, which have taken longer to catch up to past increases in the cost of living. The impact of tariffs on wages is mixed—some businesses expect upward pressure on wages from higher inflation, while others anticipate downward pressure if demand suffers.

Many firms also believe that a widespread implementation of tariffs would lead to higher selling prices (Chart 11) because softer demand would only partially constrain higher input costs. Firms attribute a substantial portion of the increase to the effects of Canadian retaliatory tariffs. Firms that would raise their selling prices often said they would do so quickly—within six months. At the same time, some firms do not expect to raise prices even if tariffs are implemented. This includes those firms that are:

• not expecting cost increases for their business
• choosing to not pass along higher costs for demand-related reasons
• unable to pass along higher costs (due to, for example, global market prices or already-established contracts)

Although US tariffs on Canadian goods are imposed on the US importer, exporting firms had mixed responses regarding who would ultimately pay US tariffs. Half of them do not plan to help their US customers absorb the tariff costs.

• A few expect lower export volumes as a result. These firms often said they would try to pivot to other international markets. But pivoting is seen as challenging given stiff competition and increased costs associated with bringing products to new markets.
• Commodity exporters cited strong US demand, lack of alternatives to their products, or low margins as reasons why they would not absorb tariff costs.

Other exporters are taking steps to maintain their US market share, including by sharing some portion of the tariff costs with their US customers.

Firms’ near-term inflation expectations have increased considerably since last quarter (Chart 12). Concerns around the inflationary impacts from tariffs are outweighing reduced inflationary pressures from weak demand. Both businesses and consumers expect trade tensions to lead to higher prices.2 Longer-term expectations for inflation, meanwhile, remain largely unchanged.