Results of the third-quarter 2026 survey | Vol. 23.3 | October 19, 2026

The Business Outlook Survey was conducted by in-person, video and phone interviews from August 6 to September 2, 2026. About three-quarters of the interviews took place before trade talks between Canada and the United States broke down and new Canadian counter‑tariffs were announced. The Business Leaders’ Pulse is conducted online every month; the latest results are from July, August and September 2026. This quarter’s publication also includes results from special consultations in July and August about how firms are adapting to trade tensions and uncertainty.

Overview

  • Survey evidence, gathered mostly before the breakdown in Canada‑US trade talks and the announcement of new counter‑tariffs, shows that overall business sentiment improved in the third quarter of 2026 after deteriorating in the previous quarter.
  • Firms reported better sales outlooks than in the second quarter. At the time of the survey, a lessening of the drag from both trade tensions and geopolitical uncertainty in the Middle East largely drove the improvement. Businesses also reported improved outlooks for export sales, supported primarily by solid US demand and high oil prices.
  • Firms’ investment intentions eased slightly but remain robust. Trade tensions and related uncertainty are weighing on the plans of several firms, but solid demand and elevated commodity prices support the investment plans of other firms. Despite some improvements in demand, firms’ hiring intentions remain soft, and most firms plan to keep headcounts unchanged.
  • The majority of firms still report spare capacity, but a slightly larger share than last quarter reported that they would have difficulty meeting an unexpected increase in demand.
  • Firms’ expectations for growth in their input and selling prices moderated but remain elevated. These expectations were often attributed to the impact of high global oil prices and trade tensions.
  • Firms facing larger‑than‑normal cost increases plan to continue passing them on to customers. For several firms, plans to further pass through costs reflect somewhat improved demand conditions and efforts to make up for past margin compression.
  • Compared with the previous quarter, firms’ inflation expectations eased overall but remain elevated.
  • Results collected since the breakdown in Canada‑US trade negotiations suggest that the new US tariffs and Canadian counter‑tariffs are weighing on firms’ outlooks (Box 1). Inflation expectations have risen alongside the new tariffs and the recent rebound in energy prices. The tariffs are also dampening business sentiment, weakening outlooks for exports and investment, and putting upward pressure on costs and prices.
  • More generally, firms are adjusting to trade tensions through a range of measures, including modifying supply chains, increasing efficiency, exploring new markets and scaling back on capacity (Box 2).
More data and charts are available on the survey data page.

Business sentiment improved on average this quarter

After deteriorating in the previous quarter, largely because of the war in the Middle East, business sentiment improved in the third quarter of 2026 (Chart 1). Although rising input costs and geopolitical uncertainty related to the war continue to weigh on business conditions, reports of these pressures were less widespread than in the second quarter. After trade talks between Canada and the United States broke down, firms also cited new US tariffs on some goods exports and Canadian counter‑tariffs as factors weighing on their outlooks (Box 1).

The share of firms planning or budgeting for a recession in Canada over the next 12 months declined from 17% to 6%, the lowest level since the question was introduced in 2023. This decline was consistent with improved business sentiment early in the quarter.

Chart 1: More firms reported favourable business conditions than in the previous quarter

Firms’ sales outlooks have improved

Firms reported stronger past sales and improved sales outlooks in the third quarter. The balance of opinion on indicators of future sales is now above its historical average (Chart 2).

At the time of the survey, several factors were supporting domestic sales outlooks:

  • Trade tensions, the war in the Middle East and heightened uncertainty related to both weighed less on firms’ outlooks for domestic sales than they did in the second quarter. In particular, indirect effects, such as dampened consumer confidence and reduced spending by businesses in tariff‑affected sectors, had a less severe impact than in the previous quarter.
  • Firms in consumer discretionary sectors reported somewhat improved sales outlooks, supported by increased demand for budget‑friendly offerings and stronger tourism activity.
  • For firms tied to housing, sales outlooks remain weak but have improved somewhat since last quarter. However, this improvement reflects signs that demand is stabilizing after a period of softening, not a recovery.
  • As in recent surveys, several firms reported that public spending, particularly on infrastructure projects and defence, is supporting their outlooks.

Chart 2: Firms’ indicators of future sales have strengthened

Evidence collected before the breakdown in trade talks showed that indicators of export sales increased slightly in the first part of the quarter and remained well above the historical average, suggesting continued strength (Chart 3). As well, several factors were supporting outlooks for export sales:

  • Solid foreign demand, particularly from the United States, is strengthening exporters’ outlooks. This is evident across a range of industries, including manufacturing, tourism and professional services, as well as among firms benefiting from artificial intelligence (AI) and other infrastructure investment in the United States.
  • Elevated commodity prices and expansions in production and transportation capacity are supporting export sales among natural resource firms, especially in oil and gas.
  • As in the previous quarter, few exporters said trade tensions and related uncertainty were weighing on their sales outlooks.

In special consultations, exporters reported taking a variety of actions to adapt to trade tensions (Box 2). Some said they are looking for new opportunities by diversifying their export markets and adjusting their products or services to better align with new customers.

Chart 3: Indicators of future export sales remain above average

Investment plans remain robust, but hiring intentions are soft

Firms’ investment intentions eased slightly but remain robust (Chart 4). Improvements in demand conditions are supporting investment plans overall. For natural resource firms, strong demand and elevated commodity prices are supporting investment outlooks. Across sectors, firms reported plans to invest in digital technologies, including AI tools embedded in software, machinery and automation systems aimed at improving efficiency. Overall, firms reported that trade tensions were weighing less on near‑term sales. However, uncertainty about the longer‑term trade environment continues to restrain firms’ capital spending plans. Results collected since Canada‑US trade talks broke down suggest that renewed trade tensions are further dampening firms’ investment plans (Box 1).

Businesses’ employment intentions remain soft and below their historical average (Chart 4). Most firms anticipate keeping staffing levels unchanged, often commenting that current levels are sufficient to meet expected demand. Several firms also expect automation and other efficiency improvements to raise productivity, allowing them to meet increases in sales without adding workers. Firms planning to expand their workforces generally reported improved demand, often linked to public spending or natural resources.

Chart 4: Firms’ investment plans remain robust, while employment outlooks are soft

Excess capacity remains but has narrowed slightly

Most firms continued to report that their current physical capacity and workforce are sufficient. The share that said they would have difficulty meeting an unexpected increase in demand rose to its historical average (Chart 5). The increase came from firms anticipating some difficulty; only a few firms expected significant difficulty. Slightly more firms than last quarter pointed to physical capacity constraints and supply chain disruptions as sources of capacity pressures.

Compared with the previous quarter, a larger share of firms said finding labour was more difficult than a year earlier. However, reports of binding labour shortages were roughly unchanged and remain below their historical levels (Chart 5). Firms often attributed their labour shortages to structural issues, such as difficulties recruiting workers in rural areas. These shortages were mostly concentrated in skilled trades and specialized technical positions. However, a few firms also reported more broad-based shortages, attributing them mostly to changes in immigration policy.

Chart 5: Capacity constraints have increased, but labour shortages remain limited

Firms expect price growth to stay elevated

Firms’ expectations for wage growth have been roughly unchanged since mid‑2024 and remain near the historical average (Chart 6). Slightly more businesses than last quarter expect wages to grow over the next 12 months at about the same pace as they did over the past 12 months. Cost‑of‑living adjustments continue to be the main factor supporting firms’ wage growth expectations. One‑tenth of firms, a larger share than in recent quarters, also said efforts to attract and retain workers are putting upward pressure on expected wage growth.

Chart 6: Expected wage growth is roughly unchanged and near the survey average

Firms expect increases in their non‑labour input costs and selling prices over the next 12 months to moderate but remain elevated (Chart 7). Most firms continued to cite higher fuel prices, linked to the war in the Middle East, and tariffs as sources of upward pressure on expected costs. However, firms surveyed before the breakdown in trade talks and recent surge in oil prices generally expected such cost increases would ease compared with last quarter.

Chart 7: Expected growth in input and selling prices remains high despite easing

Roughly half of firms, more than in the previous quarter, said they plan to pass on to customers some or all of their cost increases related to the war in the Middle East and tariffs. After already passing through some earlier cost increases, firms, especially consumer‑facing ones, plan to continue passing on past increases to customers over the next 12 months (Chart 8). These pricing plans reflect some improvements in demand as well as firms’ desire to recover margins compressed by earlier cost increases. However, several firms, more than in the previous quarter, also reported that competitive pressures continue to limit their ability to increase prices.

Chart 8: Firms that have seen larger-than-normal cost increases plan to pass through more of these costs

In July and August, firms’ expectations for inflation one year ahead remained below the elevated levels reached when oil prices surged in April amid the war in the Middle East (Chart 9). However, firms’ one‑year‑ahead inflation expectations rose again in September following the breakdown in trade talks and the recent increases in oil prices (see Box 1). Compared with the second quarter, firms’ average expectations for inflation over the next two years remain elevated and expectations for five years from now remain roughly unchanged.

Firms expressed greater uncertainty about the timing of inflation’s return to 2%. When asked when they think inflation will return to 2%, almost one‑quarter of firms, a larger share than in the previous quarter, said it was too hard to say.

Chart 9: Near-term expectations for inflation have increased

Box 1: Firms’ outlooks have deteriorated since trade talks broke down

Survey results collected since the breakdown in Canada‑US trade negotiations on August 21 suggest that new US tariffs and Canadian counter‑tariffs are weighing on firms’ outlooks.

Firms surveyed after trade talks broke down reported weaker sentiment and lower expectations for export sales than those surveyed beforehand (Chart 1-A). These recent results suggest that some of the improvement in firms’ outlooks reported earlier in the third quarter of 2026 has reversed. Nevertheless, sentiment and expectations remain considerably stronger than at the height of trade tensions in 2025, suggesting a moderation rather than a fundamental shift in firms’ outlooks.

Responses collected since August 22 also point to higher inflation expectations accompanying rising oil prices and new tariffs (Chart 1-A). Inflation expectations have increased noticeably, but they have not returned to the elevated levels reached at the onset of the trade conflict with the United States in early 2025 and around the peak in oil prices in April 2026 linked to the war in the Middle East.

Chart 1-A: Firms’ outlooks deteriorated after the collapse in trade talks and amid surging oil prices

Since trade talks broke down and new tariffs were announced, trade tensions have weighed more heavily on investment plans than they did in early August (Chart 1-B). The drag from trade tensions had been easing through early August 2026 but has since returned to levels similar to those seen in late 2025 and early 2026.

Chart 1-B: Trade tensions are once again weighing on investment plans

Firms surveyed after the collapse in trade talks were also more likely than those surveyed beforehand to report that ongoing trade tensions have raised their costs and prices (Chart 1‑C). Similar to results of past surveys, among the firms surveyed most recently, the share reporting that trade tensions had increased their costs was larger than the share reporting increased selling prices. This is consistent with tariff‑related cost increases being only partially passed on to customers.

Chart 1-C: Since the breakdown in trade talks, more firms expect higher costs and selling prices

Box 2: Firms are adapting to trade tensions

In special consultations conducted in July and August and in reply to special survey questions in September, firms reported a range of actions they have taken in response to trade tensions since early 2025 (Chart 2-A).

  • Many firms are seeking efficiency gains and ways to reduce cost pressures. Common actions include:
    • modifying supply chains, including by changing suppliers or sourcing inputs from alternative jurisdictions, to reduce exposure to tariffed products
    • increasing spending on technology, including automation and artificial intelligence, to improve efficiency and offset higher costs associated with the trade environment
  • Businesses are also looking for new opportunities by diversifying their export markets and adjusting their products or services to better align with the needs of new clients. For example, some aluminum firms are entering European markets, and some steel firms are expanding domestically with federal procurement and defence spending.
  • Some firms are making adjustments that involve reducing capacity, including:
    • scaling back operations, production capacity or employment in response to weaker demand
    • reducing investment in Canada or shifting it abroad to limit exposure to tariffs, especially in the steel and auto sectors where tariffs are favouring US expansion projects
    • adopting a wait‑and‑see approach to investment amid ongoing trade uncertainty

Many businesses characterized these adjustments as temporary because they expect tariffs to eventually be removed or amended. For example, several firms said they could reverse changes to their supply chains if trade conditions improve and retaliatory tariffs are removed. However, some firms reported making permanent adjustments to adapt to the new trade environment.

Chart 2-A: Since the onset of trade tensions, many firms have been adapting in response

Survey results report opinions expressed by the respondents and do not necessarily reflect the views of the Bank of Canada.

The Bank of Canada’s Business Outlook Survey is conducted by the Bank’s regional office staff through interviews with the senior management of about 100 firms selected to reflect the composition of the gross domestic product of Canada’s business sector. Additional information on the survey and its content is available on the Bank of Canada’s website.

The Bank of Canada’s Business Leaders’ Pulse is a survey of 700 to 1,000 Canadian business leaders who respond to one of three short online questionnaires each month. For more information on the Business Leaders’ Pulse, see T. Chernis, C. D’Souza, K. MacLean, T. Reader, J. Slive and F. Suvankulov, “The Business Leaders’ Pulse—An Online Business Survey,” Bank of Canada Staff Discussion Paper No. 2022-14 (June 2022).

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