The Bank of Canada released new business outlook surveys on Monday, revealing that the Iran war negatively impacted business confidence and led to an increase in inflation expectations. This dual effect prompted the central bank to introduce new metrics to monitor sales and price activity in a volatile economic environment.
According to the latest surveys by the Bank of Canada, input costs and geopolitical uncertainty rose in the past three months, affecting sales expectations for most firms outside the oil and gas sector in the Prairies. The percentage of businesses preparing for a potential recession in the coming year doubled to 17%, up from 9% in the previous quarter, though still lower than levels observed in 2025.
On a positive note, businesses reported reduced uncertainty related to trade disruptions with the United States, leading to improved export outlooks driven by higher commodity prices and demand for artificial intelligence inputs. Inflation expectations among businesses surged in the second quarter due to escalating energy prices linked to the Middle East conflict.
The central bank noted that projected price increases reached a four-year high in the last quarter, with most surveys conducted in May during heightened uncertainty surrounding the Iran war. Subsequent surveys in the following weeks showed a peak in inflation expectations in April, followed by a decline after a peace agreement was signed in mid-June.
Consumer spending intentions decreased in the past quarter, particularly among households anticipating price hikes due to Middle East tensions. These cautious consumers were more inclined to seek discounts, reduce driving, and postpone major purchases.
The Bank of Canada announced the division of its benchmark indicator into two new measures to separately track firms’ expectations for sales, hiring, and investment, as well as input and selling prices, wages, and inflation. The bank highlighted that external shocks like the Iran war can cause divergence between these metrics, necessitating separate indicators for activity and prices to enhance interpretation during such episodes.
Economist Robert Kavcic noted that the recent outlook surveys reflected the central bank’s challenge in deciding on interest rate adjustments to address economic conditions. However, with declining inflation expectations following a decrease in global oil prices, the Bank of Canada is likely to maintain its current interest rate of 2.25% during the upcoming decision on July 15.