January 22, 2025
Canadian businesses and consumers are growing more confident about the economic outlook following a series of interest rate cuts, although there is trepidation about the potential impact of U.S. tariffs, according to a pair of Bank of Canada surveys published Monday.
The central bank’s quarterly survey of businesses, conducted in November, found a growing number of companies expect sales to improve over the coming year. More businesses also plan to resume investments that had been put on hold in recent years due to high interest rates and tepid demand.
A separate survey showed consumers are feeling more confident about their finances and plan to increase spending. Although, nearly half of the survey respondents still expect a recession in the coming year.
Together, the surveys suggest the bank’s quick succession of rate cuts since the summer – which brought the policy rate down to 3.25 per cent from 5 per cent – is buoying consumer and business sentiment. Meanwhile, the decline in inflation is showing up in lower expectations for price increases, potentially paving the way for more interest rate cuts.
Financial markets expect the central bank to continue easing monetary policy on Jan. 28, with investors putting the odds of another quarter-point cut at around 75 per cent, according to LSEG data.
“The positive trends in consumer and business sentiment appear to hinge on further rate cuts. As a result, we don’t see these responses as derailing a 25-basis-point rate reduction next week,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients.
“These results also align with our view that the Bank of Canada is headed towards a 2-per-cent terminal rate early in 2026, even if U.S. tariff policy takes a while to materialize. With inflation expectations normalizing, the door is open for the Bank of Canada to keep lowering rates in an attempt to push the unemployment rate down and absorb economic slack,” he added.
The Business Outlook Survey indicator, which captures the general feeling of survey respondents, improved for the third consecutive quarter. It remains below average, with companies still worried about soft demand, economic uncertainty and taxes and regulations. However, the bank noted “signs of emerging optimism, with business activity showing tangible improvements from its low level.”
There are, nonetheless, concerns about a potential trade war with the United States, following the inauguration of President Donald Trump. Around 40 per cent of survey respondents said they expected the new U.S. administration to have a negative impact on their businesses, with trade tensions raising the cost of inputs.
Canadian consumers also see a risk from the incoming U.S. administration. Nearly half said they expected a recession in the coming year, and 58 per cent said they remain uncertain about where the economy is heading. “Survey results show that the sources of this uncertainty have shifted from interest rates and government policies to global tensions, including from the new U.S. administration,” the bank noted.
Mr. Trump has threatened to put sizable tariffs on Canadian imports, although U.S. media reports on Monday said that he will not follow through on this threat right away.
More broadly, consumers are becoming more confident about their financial health as mortgage rates have come down and credit has become easier to access. That’s showing up in increased spending plans and revival in interest in real estate.
But there are still patches of concern. The consumer survey found that the perceived risk of missing a debt payment has increased, especially among renters. And consumers think the labour market is weakening, with more reporting an increased probability of losing their jobs than a quarter ago.
