Business Outlook Survey—Second Quarter of 2025

Results of the second-quarter 2025 survey | Vol. 22.2 | July 21, 2025

The Business Outlook Survey was conducted by in-person, video and phone interviews from May 8 to 28, 2025. The Business Leaders’ Pulse is conducted online every month; the latest results are from April, May and June 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.

Overview

• Tariffs and related uncertainty, along with spillover effects on the Canadian and global economies, continue to have major impacts on businesses’ outlooks. However, the worst-case scenarios that firms envisioned last quarter are now seen as less likely to occur.
• Sales outlooks remain pessimistic overall due to widespread concerns about the broader effects of a slowing economy. But recent monthly survey results suggest some improvement in firms’ outlooks—particularly among exporters—because few have been directly affected by the current tariffs.
• Uncertainty continues to drive cautiousness in outlooks for hiring and investment. Most firms expect to maintain current staffing levels and limit investment to regular maintenance over the next 12 months.
• For some, cost increases due to tariffs and trade uncertainty have materialized. Affected firms see weak demand and competition as constraining their ability to pass cost increases on to their customers, although most still plan for some pass-through.
• Businesses’ expectations for short-term inflation have returned to levels reported at the end of 2024.

Last quarter, firms described the economic environment as highly unpredictable, which made it difficult for them to form a clear outlook for the year ahead. This quarter, more firms can now form an outlook with greater confidence, although they still report that it is hard or somewhat hard to do so. Fewer businesses are considering extremely negative scenarios in their planning.

Nevertheless, uncertainty around financial, economic and political conditions remains the top concern for firms. While worries about tariffs directly affecting Canadian businesses have eased slightly, new concerns have emerged about the broader impacts of tariffs on the global economy and on demand in Canada. Uncertainty is still causing firms to hold off on new investment plans and to conservatively manage their finances, among other actions (Box 1).

Business sentiment, although still subdued, has improved from the sharp declines recorded in March and April 2025 (Chart 2). Both the previous declines and the recent rebound were seen across exporters and non-exporters, though sentiment among exporters in particular fell sharply during the earlier stage of the trade conflict. Similarly, the share of firms planning for a recession in Canada has declined slightly—from 32% to 28%—but remains above 2024 levels, reflecting ongoing concerns about trade tensions.

Despite this, the direct impacts tariffs are having on firms’ outlooks are less severe than in the first quarter. Outlooks have improved among businesses strongly affected by trade tensions because the tariffs that have materialized so far are less broad-based than those feared earlier in the year. Most exporters in the Bank of Canada’s business surveys reported not currently being subject to tariffs. This is reflected in improved expectations for export sales growth (Chart 4). However, in special consultations with Bank staff, exporters currently facing sectoral US tariffs—including manufacturers of steel and aluminum products and firms in the auto sector—continued to report weak outlooks.

Firms’ investment intentions remain muted this quarter, with the balance of opinion well below its long-term average. Many businesses are scaling back their investment plans or putting new investments on hold because of:

• soft demand
• ongoing uncertainty
• sufficient existing capacity

More firms than usual are focusing their investments on routine maintenance rather than expanding capacity or improving productivity (Chart 6). Yet fewer firms than last quarter expect tariffs and trade tensions to negatively affect their investment plans. This is particularly true for those in the trade-exposed and capital-intensive manufacturing sector.

Similarly, hiring intentions remain subdued. Fewer firms than usual plan to increase their labour force over the next year (Chart 7). The shares of firms that are hiring to meet expected sales increases, filling vacant positions, or holding on to excess labour are all below average. However, fewer firms than last quarter expect tariffs to weigh on their hiring plans. Likewise, for consumers in the Bank’s Canadian Survey of Consumer Expectations who work in trade-sensitive sectors, job concerns remain elevated but have diminished from last quarter.

When asked about layoffs, many firms said they would conduct layoffs only if they experienced a sharp or prolonged decline in sales. Even then, layoffs were often viewed as a last resort. Indeed, the share of firms expecting to reduce headcount over the coming year remains largely unchanged and near its historical average.

Firms’ expectations for wage growth over the coming year continue to trend lower (Chart 8). Past disinflation and weak demand are putting downward pressure on businesses’ wage expectations. The average expected wage increase among firms in the Business Outlook Survey is now near its pre-pandemic average. The share of firms planning larger-than-normal wage increases has continued to trend down, with most firms having now returned to what they consider normal wage increases.

Cost pressures from trade tensions remain

Cost pressures continue to be widespread. Roughly half of firms reported already facing additional tariff-related costs. Beyond the direct impact of tariffs on input prices, firms also reported facing additional costs related to finding alternative suppliers and developing new markets.

In this context, tariffs and trade tensions are still the primary source of upward pressure on expected growth in input prices. Firms now expect their input price growth to accelerate over the next 12 months, a contrast from much of the past three years (Chart 9). These pressures, however, remain moderate—many firms expect only slight, rather than substantial, increases in their input prices.

Tariff-related cost increases are also putting upward pressure on firms’ expected selling prices. But competitive pressures and the current weakness in demand are limiting firms’ ability to pass on these costs to customers. As a result, many businesses expect their selling prices to increase over the coming year at a similar rate as they did over the past year (Chart 10). Because customers are sensitive to price increases, many firms are absorbing a portion of these increased costs, compressing their profit margins in an effort to preserve market share (Chart 11).

Near-term inflation expectations have come back down to late-2024 levels after rising sharply last quarter (Chart 12). Like last quarter, tariffs are the primary driver of inflation expectations. But firms report that direct upward price pressures from tariffs are being partially offset by indirect tariff impacts—namely, slower demand creating disinflationary pressures. Inflation expectations for longer horizons, meanwhile, have edged slightly higher but remain within the Bank’s target range.