The Bank of Canada's latest business outlook survey reveals a mixed picture for the Canadian economy: inflation fears among corporate leaders have cooled, but so have their plans to hire and invest.
The quarterly survey, which polls executives across the country on their expectations for demand, costs, and pricing, was conducted before and after a mid-June interim agreement between the United States and Iran. That deal helped ease concerns about a spike in gasoline prices, a key driver of inflation anxiety.
In a follow-up question tied directly to the US-Iran agreement, businesses reported that their inflation expectations were at their lowest point after the deal. This suggests that companies now see less need to raise prices or boost wages preemptively to keep up with future inflation—a shift that could help the Bank of Canada in its fight to bring inflation back to its 2% target.
What the Survey Found
The Bank of Canada's business outlook survey is a closely watched indicator of where the economy is headed. It asks executives about their expectations for sales, hiring, investment, and pricing over the next 12 months. A reading above zero means more firms are optimistic than pessimistic; a negative reading signals the opposite.
While the headline inflation expectations improved, other parts of the survey painted a more cautious picture. Hiring plans weakened, and more companies reported that they are budgeting for a potential recession. This suggests that while the immediate inflation shock may be fading, the broader economic environment remains uncertain.
The survey's business outlook indicator, which summarizes overall sentiment, declined. That aligns with other recent data showing the Canadian economy losing momentum. For instance, Canada's services sector shrank in June, as high prices and uncertainty weighed on demand. And economists expect June's jobs report to show only modest gains after a surge in May.
Why the US-Iran Deal Matters for Inflation
The interim agreement between the US and Iran, announced in mid-June, was seen as a potential step toward easing geopolitical tensions and stabilizing global oil markets. Iran is a major oil producer, and any deal that could lead to increased supply tends to put downward pressure on crude prices. Since gasoline prices are a visible and volatile component of household and business costs, a drop in oil prices can quickly change inflation expectations.
For Canadian businesses, which have been grappling with high input costs and supply chain disruptions, the prospect of lower energy costs is a welcome relief. It reduces the urgency to pass on higher costs to customers, which in turn helps keep overall inflation in check.
However, the survey's findings also highlight a potential trade-off: as inflation fears recede, growth concerns are taking their place. Companies are less willing to hire and invest when they see demand softening. This is a classic pattern in the late stages of an economic cycle, where central banks' interest rate hikes—designed to cool inflation—begin to slow down the economy.
What It Means for Investors
For everyday investors, the Bank of Canada survey offers a nuanced signal. On one hand, easing inflation expectations are positive for bonds and interest-rate-sensitive stocks, because they reduce the likelihood of further aggressive rate hikes from the Bank of Canada. Lower inflation also supports consumer spending power over time.
On the other hand, weakening hiring plans and rising recession budgeting are warning signs for corporate earnings and economic growth. Companies that are cautious about the future may cut costs, delay expansion, and reduce dividends—all of which can weigh on stock prices.
The mixed data also helps explain why the Bank of Canada has been treading carefully. After raising interest rates aggressively through 2022 and early 2023, the central bank has paused to assess the impact. Recent data, including slowing US services growth and BMO's view that Canada's economy will rebound after a soft patch, suggest the global economy is in a delicate transition.
Investors should watch for the Bank of Canada's next interest rate decision, as well as upcoming economic data on jobs, retail sales, and inflation. If the cooling in inflation expectations continues without a sharp downturn in the labor market, it could be a favorable environment for both stocks and bonds. But if recession fears deepen, defensive sectors like utilities and consumer staples may outperform.
Ultimately, the survey underscores that the path to a soft landing—where inflation falls without triggering a recession—remains uncertain. Canadian businesses are feeling less heat from inflation, but they are also turning up the air conditioning on growth.
