Canada Q3 business outlook indicator edges higher to -0.33 from -0.38

• The business outlook survey (BOS) indicator came in at -0.33, versus -0.38 in the second quarter, a figure that was revised from -0.39.
• The future sales balance of opinion jumped to +42 from +15 in Q2.
• Only 18% of companies reported an outright sales decline over the past year, down from 22% in the prior quarter.
• The share of firms anticipating a recession in the coming year fell to 6% from 17% in Q2.
• Some 41% of businesses see inflation exceeding 3% over the next two years, compared with 44% in the second quarter.
• Consumers' five-year inflation expectations rose to 3.91% from 3.39% in Q2.
• The proportion of consumers expecting a recession within a year eased to 53.0% from 54.6% in the second quarter.

About three-quarters of the Business Outlook Survey interviews took place before Canada-US trade talks collapsed and Ottawa unveiled new counter-tariffs, making the data outdated. The same applies to the consumer survey, with roughly three-quarters of responses collected before the August 21 breakdown. The article contends the 'breakdown' was not particularly harmful, though that is open to interpretation.

Regardless, the snapshot looked fairly positive. The leap in the future sales balance to +42 from +15 marked a significant shift, with companies attributing it to reduced trade tensions and diminished Middle East risk.

Exporters benefited from strong US demand and elevated oil prices. Investment plans dipped only marginally and stayed robust. Hiring remains a weak point, as most firms intend to keep staff numbers unchanged.

The Bank of Canada tackled the timing issue directly in a special section examining results gathered after the talks fell apart. From the survey perspective, the new US tariffs and Canadian retaliation are dragging on export and investment prospects, driving up costs and prices, and inflation expectations have increased in step with the tariffs and the energy rebound. The central bank wrote:

Firms surveyed after trade talks broke down reported weaker sentiment and lower expectations for export sales than those surveyed beforehand. These recent results suggest that some of the improvement in firms’ outlooks reported earlier in the third quarter of 2026 has reversed. Nevertheless, sentiment and expectations remain considerably stronger than at the height of trade tensions in 2025, suggesting a moderation rather than a fundamental shift in firms’ outlooks.

Input and output price expectations among businesses have moderated but stay high, largely linked to oil and trade. A greater concern for the Bank of Canada: firms confronting large cost rises intend to continue passing them along, and some view stronger demand as an opportunity to recoup margins they previously surrendered. That sort of behaviour can keep inflation persistent.

Consumer survey

The genuine warning sign comes from consumers. Their five-year inflation expectations surged by over half a percentage point to 3.91%, equalling the already high short-term readings.

When long-term expectations converge with short-term ones, it signals the de-anchoring that central banks dread. Moreover, the Bank of Canada notes that expectations across all time frames rose after the trade talks collapsed, making the actual figure probably even higher.

Households indicated improved financial conditions due to asset growth and slightly stronger labour market confidence, yet spending plans weakened from already low bases. High prices and uncertainty are blamed. Notably, labour market views brightened for workers affected by US trade but darkened for those in roles with high exposure to AI replacement risk.

While today's CPI figures were encouraging for the Bank of Canada, this survey prompts some hawkish concerns.