Most Canadian businesses aren’t battling tariffs, RBC says

The Bank of Canada’s latest Business Outlook Survey shows Canadian businesses are growing more confident, despite softer near-term demand.

In a July 21 RBC Economics newsletter, Senior Economist Claire Fan noted that while sales expectations dipped in the second quarter, overall outlooks improved and inflation expectations continued to normalize. The survey, conducted from early to late May, captured a period of easing global trade tensions. Fewer businesses are now planning for extremely negative scenarios, and most exporters surveyed said they are not currently facing tariffs.

“This aligns with our analysis that critical exemptions for USMCA-compliant goods are allowing the vast majority of Canadian exports to enter the U.S. duty-free,” Fan said. “However, businesses subject to tariffs, including steel and aluminum manufacturers and auto companies, continue to maintain softer outlooks.”

Trade uncertainty continues to weigh on hiring and investment plans. Many firms reported rising input costs but said they have limited ability to pass those costs on, leading to margin pressure.

Inflation expectations among businesses eased to 2.9% in June, down from a recent peak of 3.7% in April, mainly due to weaker demand. In contrast, consumer inflation expectations remained elevated above 4% in Q2. Longer-term business expectations stayed within the 2.5% to 3% range, though slightly higher than a year ago.

“We maintain that the BoC faces an unusually high hurdle for considering additional rate cuts,” Fan said. “The central bank must also account for increased government support, which is better suited to address concentrated weakness in trade-exposed sectors than the blunt tool of lower interest rates. Our base-case forecast continues to project that the BoC will maintain the overnight rate at current levels going forward.”

Fan also pointed to several factors behind softer future sales prospects, including weak consumer and housing activity, low global oil prices affecting the energy sector, and the fading of a short-lived export boost earlier this year tied to tariff front-running.

Capacity concerns remained limited. Fewer firms than usual reported difficulty meeting unexpected demand, and labour shortages were near record lows. With expectations of soft demand and lingering trade uncertainty, most firms continued to delay or scale back investment. Hiring plans remained cautious, and while layoffs were uncommon, they were seen as a last resort.

“Wage growth expectations have broadly continued to ease,” Fan said. “But input prices are again expected to rise faster over the next 12 months. Businesses are having trouble passing those increases on to consumers, citing weak demand and ongoing pressure on margins.”

-30-