The Bank of Canada unveiled findings from its latest business outlook surveys on Monday, revealing that the Iran war negatively impacted business confidence and led to a surge in inflation expectations. This prompted the central bank to introduce new measures to monitor sales and pricing trends in a volatile economic environment.
The surveys highlighted a rise in input costs and geopolitical uncertainty over the past three months, particularly affecting sales forecasts for most firms outside the oil and gas industry in the Prairies. Concerns about a potential recession increased significantly, with 17% of businesses anticipating an economic downturn in the coming year, up from 9% in the previous quarter but still lower than levels seen in 2025.
Despite ongoing trade disruptions with the United States, businesses reported reduced uncertainty and improved export outlooks due to higher commodity prices and demand for artificial intelligence inputs. Inflation expectations among businesses surged in the second quarter, driven by escalating energy prices associated with the Middle East conflict.
The central bank noted that projected price hikes reached a four-year high last quarter, with most surveys conducted in May during heightened uncertainty surrounding the Iran war. Subsequent surveys indicated that inflation expectations peaked in April and decreased following a peace agreement in mid-June.
Consumer spending intentions declined in the past quarter, especially among households anticipating price increases due to geopolitical tensions. These cautious consumers were more inclined to seek discounts, reduce driving, and postpone significant purchases.
To better analyze economic signals, the Bank of Canada decided to split its benchmark indicator into two separate measures. One will track firms’ expectations for sales, hiring, and investment, while the other will focus on input and selling prices, wages, and inflation. This adjustment aims to provide clearer insights into economic shocks, such as the impact of events like the Iran war on business expectations.
Despite the dilemma faced by the central bank in recent months regarding interest rate adjustments, experts anticipate a decline in inflation expectations this quarter as global oil prices have moderated. The Bank of Canada is likely to maintain its benchmark interest rate at 2.25% during its upcoming decision on July 15.