Canadian business sentiment deteriorates, inflation outlook mixed
The Bank of Canada's second-quarter 2026 Business Outlook Survey reveals a deterioration in overall business sentiment and softer sales outlooks. However, export outlooks improved, and while inflation expectations initially rose, they declined after a mid-June agreement.
Geopolitical tensions weigh on sentiment
Overall business sentiment deteriorated this quarter, reversing improvements seen over the past three quarters.
More firms reported that rising input costs and geopolitical uncertainty from the Middle East war are weighing on conditions, with recession planning rising from 9 percent to 17 percent.
Sales outlooks softened, especially for consumer discretionary spending, as elevated fuel costs dampen demand.
In contrast, firms' export outlooks improved significantly, driven by reduced trade uncertainty, strong demand for commodity exports, and demand for AI data center-related goods in the United States.
The new BOS activity indicator declined, reflecting weaker sales, while the BOS price indicator increased due to higher inflation and price growth expectations.
Investment holds, inflation outlook shifts
Firms' investment intentions remain strong, driven by domestic demand and elevated commodity prices, particularly in the oil and gas sector, with productivity-related investments also noted.
Employment intentions, however, weakened slightly below their historical average, reflecting softer demand, though hiring increased in the Prairies.
Most businesses still report spare capacity and declining labour shortages.
Supply chain issues increased this quarter, linked to tariffs, the Middle East war, and AI data center investment, but did not significantly limit firms' ability to meet demand.
Wage growth expectations are largely unchanged.
Input and selling price expectations rose markedly due to high global oil prices, pushing inflation expectations higher before a mid-June agreement caused a decline.
A complex picture for policymakers
The survey presents a challenging environment for the Bank of Canada, balancing inflationary pressures from supply shocks against weakening demand.
The regional divergence, particularly the strength in the oil sector, complicates a uniform policy response.
This mixed signal suggests continued data dependency, with global events heavily influencing domestic economic trajectories.
Source: Business Outlook Survey—Second Quarter of 2026
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