To better understand how the trade conflict initiated by the US administration is affecting the economic decisions of Canadians, the Bank of Canada has enhanced its consultations with businesses and households.1
This update presents preliminary results from the Bank of Canada’s surveys of businesses and consumers and its consultations with businesses and industry organizations, conducted from January 29, 2025, to February 28, 2025.
Businesses and households see the economic climate as unpredictable. The scope and magnitude of planned US tariffs, along with the timing of their implementation, continue to change. This uncertainty is making it difficult for businesses to make investment and hiring decisions and to set prices.
The results of surveys and consultations reflect the prevailing conditions in late January and throughout February, specifically the threat of a 25% broad-based US tariff and Canadian retaliatory measures. The situation is constantly changing. The Bank will continue to consult with Canadian households and businesses regularly.
Household spending
Trade tensions have led households to worry more about their job security and financial health, and they now intend to spend less (Chart 1). Concern about job security is particularly evident among people working in sectors that are highly dependent on trade (Chart 2).
Businesses’ sales outlooks, investment and hiring
Businesses have revised down their sales outlooks. Indicators of future sales—such as order books and sales enquiries—have declined. This decline is particularly prominent in manufacturing. In addition, sectors that depend on households’ discretionary spending continue to report weak demand. However, some businesses note a strong “Buy Canadian” sentiment, which is likely mitigating some of the negative impact of trade tensions.
Heightened trade uncertainty has also led many businesses to scale back their hiring and investment plans (Chart 3). New investment is being further restrained because:
- Credit has become more difficult for some businesses to access.
- The cost of imported capital goods, such as equipment and machinery, has risen.
However, most businesses say they are continuing with existing investment projects, particularly projects aimed at maintaining capacity and improving productivity. In the oil and gas sector, many businesses expect only a modest impact on their near-term investment and production decisions. But a tariff would make projects less attractive to investors over the medium term.
Pricing intentions and inflation expectations
In consultations, businesses are beginning to report that the trade conflict is leading to an increase in their costs. This increase is happening through several channels:
- The Canadian dollar has depreciated since October 2024, making imported goods more expensive.
- Increased tariffs and trade restrictions affecting other countries like China are working through supply chains, affecting a variety of input costs.
- Businesses are developing plans to diversify product sources to avoid tariffs and mitigate trade disruptions, with new suppliers often being costlier than their existing suppliers.
- The lack of clarity around trade policy is making it difficult to negotiate price contracts, with some businesses raising their prices in anticipation of future tariffs.
Around half of businesses surveyed plan to increase their prices if tariffs are imposed on their inputs or products. Of those planning price increases, around three-quarters expect to pass on more than half of the tariff-related cost increases to their customers (Chart 4).
Many retailers expect that they would be able to rapidly pass on cost increases linked to tariffs if they were transparent with consumers about the reasons for the increase. But the scale and timing of price increases may be held back by competition, weak demand, and the scope and size of tariffs.
The other half of businesses surveyed are not planning to increase their prices. This includes:
- Businesses that do not expect any increase in their costs from tariffs
- A smaller number of businesses expecting cost increases related to tariffs but not expecting to pass those increases on to their customers
Trade tensions are pushing up inflation expectations
Both households and businesses expect trade tensions to lead to higher prices (Chart 5). This is reflected in a recent rise in their short-term inflation expectations (Chart 6).
Chart 6: Short-term inflation expectations have risen
Quarterly and monthly data
Note: CSCE is the Canadian Survey of Consumer Expectations; BOS is the Business Outlook Survey; BLP is the Business Leaders’ Pulse. Consensus Economics’ forecasts for the next year (based on monthly data) and the next two years (based on a combination of monthly and quarterly data releases) are transformed into fixed-horizon forecasts by the weighted average of fixed-date forecasts. 1-year-ahead refers to inflation expectations for the next 12 months. 2-year-ahead refers to inflation expectations for the period 12 to 24 months from now. 5-year-ahead refers to inflation expectations for the period 48 to 60 months from now. This question was not asked in the January or March 2022 BLP. See Appendix for the precise questions.
Sources: Consensus Economics, Bank of Canada and Bank of Canada calculations
Last observations: Consensus Economics and BLP, February 2025; CSCE and BOS, 2025Q1
Endnotes
- 1. This update presents preliminary results from the Canadian Survey of Consumer Expectations (conducted from January 29 to February 19, 2025), the Business Outlook Survey (conducted from February 6 to 26, 2025) and the Business Leaders’ Pulse (conducted from February 10 to 28, 2025). It also draws on results from consultations conducted in February with businesses and industry organizations that are sensitive to trade. Additional results from these surveys and consultations will be published on April 7, 2025.[←]