Confidence hits new lows as recession concerns mount in Canada

With a third of Canadian businesses now expecting a recession in the next 12 months—up from just 15% in the last two quarters—economic unease is clearly on the rise.

That’s one of the clearest signals from the Bank of Canada’s latest surveys, which show both business and consumer confidence weakening sharply.

The Q1 Business Outlook Survey (BOS) and Canadian Survey of Consumer Expectations, released Monday, paint a picture of growing uncertainty. Business sentiment fell to its lowest level in years, consumers are more worried about job security, and inflation expectations—after steadily easing—have started creeping back up.

And these surveys were conducted before the latest wave of U.S. tariffs hit.

Business confidence is down—and the worst may still be ahead

The BOS indicator fell to -2.14 in Q1, down from -1.16 last quarter, marking the first decline in three quarters and the lowest reading since the early months of the pandemic. One in three businesses now expect a recession in the next 12 months, up from 15% in previous quarters.

Much of this unease is tied to trade tensions. RBC notes that even before the latest round of U.S. tariffs on steel, aluminum and border goods, businesses were already growing concerned.

The Bank’s survey was conducted before those measures were announced, which means confidence may have dropped further since.

What’s especially concerning is how quickly businesses are pulling back. Investment plans, which had been rebounding in late 2024, are now being paused or scaled back.

Hiring intentions have also plunged to a nine-year low. And the outlook for sales—especially among exporters—has dimmed, with many citing uncertainty around consumer demand and global supply chain risks.

The pressure on costs is also building, with about two-thirds of businesses saying they expect higher input costs due to tariffs, and most plan to raise their selling prices within six months.

That’s driving short-term inflation expectations higher, even as firms remain cautious on wages. Long-run inflation expectations remain stable—for now.

RBC senior economist Claire Fan warned that while Canada has so far avoided the worst of U.S. tariff actions, the indirect effects are already being felt.

“To-date, Canadian retaliatory tariff measures have not been enough to cause inflation to spike substantially higher,” she said. “Canada was also largely spared in the latest round of U.S. reciprocal tariff increases. Still, spillovers from severe supply chain disruptions in the U.S. from dramatically higher tariff rates U.S. imposed on virtually all its trade partners are threatening to further slow growth and raise prices in Canada.”

Consumers are more worried about jobs, finances and prices

The Canadian Survey of Consumer Expectations painted an equally downbeat picture from the household side, with job worries, rising prices, and housing costs all weighing on sentiment.

The share of Canadians who feel secure in their employment fell to the lowest level on record, and nearly one in five now fear losing their job. On top of that, fewer consumers feel confident they could find a new job if needed.

Financial confidence is slipping too, with more than 40% of Canadians saying they’re worse off than they were a year ago, and most don’t expect things to improve any time soon. Discretionary spending is taking a hit as a result, with more households saying they’re putting off major purchases.

Notably, the share of Canadians who say high rent or mortgage payments are negatively affecting their household spending has climbed.

In Q1, one in five respondents cited housing costs as a top financial strain—up from just 16% last quarter. That’s in addition to the 45% who pointed to high prices for goods and services and the growing share concerned about economic uncertainty.

Inflation expectations have also reversed course with the median one-year inflation expectation jumping to 3.8% after declining steadily for over a year. That’s the highest since mid-2023, driven by fears of higher prices for groceries, energy, and imported goods.

Still, wage expectations remain muted. Businesses aren’t planning large raises, and consumers don’t expect them either. That could help limit the longer-term inflation risk, but it also means households have less of a cushion to absorb rising costs.

high prices and uncertainty weighing on spending

What it means for the Bank of Canada

With both business and consumer confidence deteriorating, the Bank of Canada faces a difficult balancing act.

On one hand, the economy is clearly losing steam—business investment is retreating, and consumer confidence is fading. Under normal circumstances, that would be a strong argument for cutting interest rates.

But inflation expectations are moving in the wrong direction. Tariffs and global supply jitters are pushing prices higher, which complicates the Bank’s job. Slashing rates too soon could risk re-igniting inflation, but waiting too long could make the slowdown worse.

Markets are increasingly betting on action sooner rather than later. As Canadian Mortgage Trends previously reported, bond markets now see nearly 50% odds of a rate cut at the Bank’s April 16 meeting. Weak job numbers in March and a string of disappointing economic reports have helped shift those expectations.

National Bank and RBC both suggest the Bank of Canada will likely proceed cautiously. RBC sees a 25-basis-point cut as likely at the next meeting.

“Amidst a highly uncertain backdrop, we continue to expect the Bank of Canada will move cautiously in their upcoming meetings to consider impact on both growth and inflation and the fact that fiscal policy is likely the more suitable first line of defence in response to trade-related economic weakness,” noted RBC’s Fan.

National Bank economists Taylor Schleich and Ethan Currie say the case for an immediate rate cut next week isn’t clear-cut.

While financial conditions are deteriorating, they note the economic data hasn’t yet softened enough to justify another move—at least not on its own.

“The ongoing deterioration in financial conditions, assuming it continues, could tip the scales toward easing, but if it were only up to the data, the BoC would likely pause,” they wrote.

“However next week plays out, we see scope for further easing in 2025. If incoming economic data softens as we expect, the next step lower on the overnight target could come as soon as June 4.”

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