By Promit Mukherjee and David Ljunggren
OTTAWA, July 21 (Reuters) – Canadian businesses see less chance of a worst-case tariffs scenario but remain cautious and are keeping hiring and investment under check, the Bank of Canada said in a regular quarterly survey on Monday.
Firms' short-term inflation expectations have returned to levels observed at the end of last year and the number of businesses planning for recession has declined slightly, the bank's Business Outlook Survey said.
Earlier this year firms had fretted that U.S. tariffs would hit the economy hard, triggering inflation, weak economic growth and joblessness.
But their impact has largely been contained to the steel, aluminum and automobile sectors. Inflation, job numbers and the economy have not deteriorated markedly.
“Tariffs and related uncertainty … continue to have major impacts on businesses' outlooks. However, the worst-case scenarios that firms envisioned last quarter are now seen as less likely to occur,” the survey said.
Around one-third of the firms expect higher tariff-related costs, down from roughly two-thirds in the last quarter, the bank said.
A separate monthly survey of business leaders suggests the outlook amongst companies, especially exporters, improved as few have been directly affected by the tariffs so far.
But there is still widespread uncertainty on how the U.S. measures and their impacts will play out in the economy.
The business outlook indicator – a metric of what business prospects look like under current economic conditions – fell to its lowest level in a year to a negative 2.42.
The quarterly survey said around 35% of the firms reported their indicators of order books, advance bookings and sales inquiries had deteriorated compared with 12 months ago as against 29% who said indicators had improved.
Investment intentions remain muted, the survey said, adding the balance of opinion is well below its long-term average.
Analysts and economists say the business outlook survey gives the central bank more teeth to take a call on rates.
The Bank of Canada has kept its key rate steady at 2.75% since April. Only around 12% of the current money market bets show a likely cut on July 30 when the bank will announce its monetary policy decision.
A separate survey by the central bank into consumer expectations showed 64.5% of Canadians expect a recession within the next 12 months, down from 66.5% in the first quarter.
“The trade conflict is leading consumers to become increasingly cautious about their spending plans and to change their spending behavior,” the report said. Many respondents wanted to spend money on Canadian goods and local vacations.
