Canadian businesses are more optimistic than expected, RBC says

Royal Bank of Canada senior economist Claire Fan said the Bank of Canada’s first-quarter Business Outlook Survey showed business sentiment, hiring plans and investment intentions holding up better than expected through February and March, even as inflation expectations rose amid the Middle East conflict.

Fan said the results are broadly consistent with RBC’s view that per-capita domestic demand will gradually improve in 2026 and absorb remaining economic slack, leaving little immediate reason for the Bank of Canada to act. RBC’s base case assumes oil prices will ease from recent highs but stay elevated, with a broadly neutral effect on the Canadian economy and limited second-round pressure on non-energy consumer prices. On that basis, she said, the BoC is likely to remain on hold this year while watching inflation expectations closely.

Higher oil prices are now the main inflation risk. According to the Business Leaders’ Pulse survey, firms’ one-year, two-year and five-year inflation expectations rose by 0.8, 0.6 and 0.2 percentage points, respectively, between February and late March. By the end of March, those expectations ranged from 3.0% to 4.0%, up from about 3.0% in February.

Fan said the BoC’s March follow-up survey of 20 firms exposed to the Middle East conflict also pointed to rising input costs, although pass-through to consumer prices remains uncertain because of soft domestic demand, strong competition and contractual limits.

For now, RBC continues to expect limited spillover from higher oil prices into broader inflation outside energy this year. Fan said the firm will be watching the industrial product price index, farm product price index and import price index for signs of broader cost pressure.

Beyond inflation, The survey pointed to a healthier rebound in business sentiment than expected. In the first quarter, 9.0% of firms said they were budgeting for a recession, down from 22% in the fourth quarter and the lowest since 2023.

Easing trade tensions and increased public spending on infrastructure and defence helped support sentiment. Most exporters continued to report their U.S. shipments were tariff-free under the Canada-United States-Mexico Agreement, and while firms expected higher tariff rates following the upcoming joint CUSMA review, few said that would materially affect near-term plans.

Fan said investment and hiring intentions improved to levels at or above long-run averages in the first quarter, reflecting expectations for firmer domestic demand among firms less exposed to trade tensions.

RBC still expects some softness in household discretionary spending. Fan said March follow-up surveys and RBC card-spending data both pointed to weaker discretionary goods spending, though other categories remained resilient. She said households will likely keep drawing on savings in the near term, but may have to pull back spending more sharply if oil prices stay elevated.

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