Business sentiment improves, inflation expectations tick up

The Bank of Canada's Business Outlook Survey for Q1 2026 reveals a notable improvement in business sentiment, reaching levels last seen before the trade conflict with the United States.

Fewer firms now anticipate a recession in Canada within the next 12 months, with the share declining from 22% to 9%—the lowest since 2023.

This positive shift is largely attributed to strengthening domestic demand and a reduced impact from trade tensions on sales and costs.

Firms report improved sales outlooks, partly supported by public spending on infrastructure and defence projects.

Investment and hiring intentions have also recovered, driven by a focus on increasing productivity and expanding capacity, suggesting a more robust economic outlook for the near term.

While firms surveyed before the Middle East war expected stable input and selling price growth, the conflict has introduced new inflationary pressures.

Follow-up calls with businesses in March indicated rising input costs, particularly for energy, fertilizer, and freight.

These increases are already impacting upstream segments of the value chain, such as agriculture, oil and gas, and transportation.

Although some firms further along the supply chain anticipate these costs to be passed on by suppliers in the coming months, their ability to fully pass on higher costs to consumers is constrained by factors like weak demand, consumer budgets, and existing contracts.

This suggests potential margin compression for many businesses.