July 24, 2025
The Bank of Canada published its quarterly Business Outlook Survey for Q2 2025, using responses gathered from phone, video, and in-person interviews from May 8 to 28. Overall, sentiment about the economy was mild, however most firms were less pessimistic than in the prior quarter.
Uncertainty still high, but…
Uncertainty still tops firms’ concerns, but there is less concern for direct impacts from tariffs to Canada and more concern for slowed global demand overall. Business sentiment, while up from Q1, is still very pessimistic. Given the current environment, about 28% of firms are planning for a recession.
Worries have eased substantially
While the overall outlook is still weak, a lower proportion of firms believe the worst-case scenarios they pictured in Q1:
- In Q2 2025, a third of firms believed that tariffs would lead to higher input costs compared to two-thirds in Q1. Similarly, 24% of firms expected selling prices to rise, down from 44.2% in Q1.
- The share of firms that believe there will be lower sales in Canada remained around 30%, but 13.6% expect sales to the US to drop, down significantly from the 43.6% in Q1
- Only 5% of firms expected lower employment in Canada in Q2
Source: Bank of Canada, Business Outlook Survey—Second Quarter of 2025
Note: The Q1 survey question was based on hypothetical tariffs, whereas the Q2 was based on actual tariffs in place.
Sales expectations weakening but not among exporters
As tariffs impacts have materialized, sales expectations have deteriorated versus the prior 12 months. However, exporters’ sales expectations have actually improved because few have been subject to or directly affected by current tariffs (with the exception of sectoral tariffs on steel, aluminum, and autos). As noted in one of our prior bulletins, the tariffs that materialized were not as broad based as the ones initially threatened.
Current employment levels steady
Staffing levels are steady as fewer firms than usual plan to hire additional workers over the next year. However, fewer firms (versus Q1) reported that tariffs influenced those plans and the number of firms expecting to reduce their employment in the next year remained at the historical average (10% of firms). Layoffs were found to be a last resort option for many firms. On the flip side, in the Survey of Consumer Expectations, most consumers viewed the labour market as weak, perceiving a higher than average probability of losing their job.
Investment reserved for maintenance
Investment intentions are subdued, with many businesses cutting back on investment plans or putting new investment spending on hold due to weaker demand, uncertainty, and sufficient capacity (the survey also found little indication of issues with supply chain or material sourcing). More firms are diverting investment towards routine maintenance. Importantly though, fewer firms see tariffs as a threat to their investment plans.
Passing costs onto consumers is limited
Lastly, about half of the firms reported increased costs in input prices due to tariffs. However, the expected magnitude of these increases is small, and the ability to pass costs onto consumers is limited due to weakened demand and uncertainty. Reducing profit margin has been the most common reaction among firms surveyed.
In Short
While expectations are muted, there have been improvements in business’ outlooks compared to Q1 2025. The tariffs that materialized have not been as detrimental as initially imagined and exporters (outside steel, aluminum, and auto) are less anxious. Panic has come down, but amid the widespread uncertainty, firms are putting a pause on new hires and capacity enhancing investment.
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FOR MORE INFORMATION, CONTACT:
Ali Ahmad
Research Analyst
Ontario Construction Secretariat (OCS)
180 Attwell Drive, Suite 360, Toronto, ON M9W 6A9
P 416.620.5210 ext. 222
aahmad@iciconstruction.com
