Business sentiment in Canada ticked higher in the first quarter of 2026, returning to readings comparable to those recorded before the onset of trade tensions with the United States, according to results of the Bank of Canada’s Business Outlook Survey released Monday.
The central bank said the survey was carried out from February 5 to 25, prior to the outbreak of the war in the Middle East. In that wave, the proportion of firms that are planning or budgeting for a recession in Canada over the next 12 months fell to 9% from 22% in the prior quarter - the lowest level recorded since the series began in 2023.
Respondents were less likely than in the previous quarter to report that trade tensions are weighing on their sales outlook. At the same time, a larger share of firms cited public spending as providing support to sales.
Investment intentions strengthened for a second straight quarter, with the balance of opinion on investment now well above its long-term average, the Bank of Canada noted. The improvement in investment sentiment was driven entirely by firms that said their investment plans were not affected by trade tensions.
On the labour front, nearly half of firms expect to increase staffing over the next 12 months. The share of firms planning to hire is now close to its historical average, reflecting a broadly firmer employment outlook among surveyed companies.
Firms included in the February survey anticipated that growth in input prices and selling prices would remain stable over the coming 12 months. On average, businesses projected wage growth of around 3.5% and expected that wages would rise at a slower pace than they did over the prior 12 months.
The Bank of Canada also reported a slight uptick in firms’ one-year-ahead inflation expectations. That move was attributed to views collected in March after the outbreak of the Middle East war, although expectations at all horizons continue to sit below the peak recorded during the height of the trade conflict in early 2025.
To assess the effects of the conflict, the central bank conducted follow-up calls with firms between March 18 and 27. Those follow-ups suggest that many businesses are already experiencing higher input costs tied to rising prices for energy, fertilizer and freight that the bank linked to the war in the Middle East.
Despite these emerging cost pressures, the Bank of Canada said most firms reported that their outlooks for sales, investment and employment remained roughly unchanged on balance in the follow-up contacts.
Summary
The Bank of Canada’s Business Outlook Survey indicates a modest improvement in business sentiment in Q1 2026, with fewer firms expecting a recession, stronger investment intentions among companies unaffected by trade tensions, and hiring plans near historical averages. Firms surveyed before the Middle East war foresaw stable input and selling-price growth and wage increases of about 3.5%. Follow-up calls after the conflict began show many firms facing higher input costs for energy, fertilizer and freight, while most reported little change to sales, investment and hiring outlooks.
Key points
- Recession planning among firms fell to 9% from 22%, the lowest since the series began in 2023 - impacts markets and macroeconomic outlooks.
- Investment intentions improved for a second quarter and now sit well above long-term averages; gains came from firms not affected by trade tensions - relevant to capital expenditure and equipment sectors.
- Follow-up contacts after the outbreak of the Middle East war show rising input costs for energy, fertilizer and freight - directly affecting producers and supply-chain sensitive sectors.
Risks and uncertainties
- Escalating input costs linked to the Middle East war could pressure margins for firms in sectors exposed to energy, fertilizer and freight price moves.
- Inflation expectations edged up at the one-year horizon after the conflict began, creating uncertainty for pricing and wage-setting decisions across industries.
- Although most firms reported little change to their outlooks in follow-up calls, further developments in the conflict or trade relations could alter sales, investment and employment plans.
Tags: economy, investment, employment, inflation, Canada