The Bank of Canada's third-quarter outlook survey reveals a complex landscape where improving business sentiment is being countered by trade volatility. While many firms reported better sales prospects, the recent collapse of trade negotiations between Canada and the United States has introduced significant uncertainty regarding tariffs and inflation.
The August trade breakdown and its tariff fallout
The Bank of Canada's latest outlook survey, conducted between August 6 and September 2, presents a snapshot of an economy caught between recovery and retaliation. While the report suggests that business sentiment improved on average during the third quarter, this optimism remains fragile. As the Bank of Canada reported, a significant portion of the data—roughly three-quarters of the interviews—was collected before the breakdown of trade talks between Canada and the United States at the end of August.
The breakdown of trade talks between Canada and the United States in late August has introduced significant uncertainty into the economic outlook. The report notes that these trade tensions, alongside geopolitical instability in the Middle East , are actively weighing on export and investment intentions. This creates a tension where the improved sales outlooks seen in the second quarter may be quickly eroded by the costs of a burgeoning trade war.
Why 50% of firms may pass costs to customers
Inflationary pressures are resurfacing as a primary concern for Canadian businesses. According to the Bank of Canada, inflation expectations have climbed, driven by a combination of new tariffs and recent spikes in energy prices. This trend is directly impacting how companies manage their margins.
The ability of Canadian businesses to pass costs to consumers varies significantly across different sectors.. The survey indicates that approximately half of the interviewed firms plan to pass some or all of their increased costs onto their customers. While some businesses are attempting to recover lost margins from previous periods, others are constrained; the report highlights that an increasing number of companies cited competitive pressures as a barrier to raising prices.
Resilient investment intentions amid rising long-term inflation expectations
Despite the friction in trade and the rising cost of goods, busness investment intentions have remained relatively resilient. The Bank of Canada noted that while these intentions eased slightly, they remain robust, supported by overall improvements in demand conditions. This suggests that the core machinery of Canadian business is still geared toward growth, even as the external environment becomes more volatile.
Canadian consumer expectations are showing a notable shift as long-term inflation projections rise to match short-term views. While consumers reported feeling better about their financial health compared to the previous quarter, the dual weight of high prices and economic uncertainty continues to loom large. This divergence between business investment resilience and consumer caution could define the Canadian economic trajectory in the coming months.
The gap between August survey data and the October 28 rate decision
The most significant question remaining is how much of the recent trade volatility is actually reflected in the Bank of Canada's upcoming monetary policy decisions.. Because the majority of the survey data was gathered before the trade talks collapsed in late August,the current findings may understate the true level of pessimism regarding exports and investment.
It remains unclear how the weakened export and investment intentions cited by firms will manifest in the official economic data before the next interest rate decision on October 28. Furthermore, the report does not specify which specific industries are most vulnerable to the new U.S. and Canadian tariffs . without knowing if the impact is concentrated in manufacturing, agriculture, or other sectors, it is difficult to predict whether the Bank of Canada will view these inflationary pressures as transitory or as a structural shift requiring a more aggressive interest rate response.
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