The Bank of Canada released the findings of its quarterly business survey on Monday.Sean Kilpatrick/The Canadian Press
Canadian business sentiment was dented by the war in the Middle East, but company outlooks for exports are improving while investment intentions remain strong, according to the Bank of Canada’s quarterly business survey.
The global oil price shock, caused by the U.S.-Iran war, reverberated through the Canadian economy in the late spring, leading many businesses to trim their sales outlooks and pencil in higher selling prices.
The survey, however, already looks dated. It was conducted from May 1 to May 21, when benchmark oil prices were above US$100 a barrel owing to the closing of the Strait of Hormuz.
In mid-June, Washington and Tehran struck a peace deal that has allowed oil tankers to once again transit the crucial strait. The price of a barrel of West Texas Intermediate Crude has since fallen to around US$68, roughly where it was when the war began in late February.
Amid the oil price shock, the survey found that business expectations for input costs and selling prices over the next 12 months “increased considerably.” Nearly three-quarters of firms said their costs had increased because of the war, and around a third of respondents said they would fully pass these cost increases along to customers.
Likewise, business expectations for inflation over the next two years increased, with companies saying they thought inflation would remain in the 3-per-cent to 3.5-per cent range. Although follow-up surveys conducted online found that inflation expectations have declined since the U.S.-Iran deal was announced in mid-June.
The Bank of Canada has been watching business expectations closely to see if the jump in oil prices is morphing into broader inflationary pressures.
So far, Bank of Canada Governor Tiff Macklem has said the supply-side shock – which pushed headline inflation to 3.2 per cent in May – isn’t spreading out to broader goods and services prices. Financial markets widely expect the central bank to hold interest rates steady at its next rate decision on July 15.
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“The latest Business Outlook Survey highlights the dilemma the Bank of Canada was facing at the height of the U.S.-Iran conflict, with soft growth countered by clearly mounting inflation concerns,” Bank of Montreal senior economist Robert Kavcic wrote in a note to clients. “Lower oil prices should help dial these concerns back in Q3. All in, we still see the Bank of Canada firmly on hold this year.”
The impact of the oil price shock has varied across the country. In the Prairies, companies reported stronger sales and hiring outlooks led by firms in the oil and gas sector, the bank said.
In May, the bank held consultations with energy companies in Calgary and found that their investment plans had been revised up – with some caveats.
“Oil sands producers tend to remain cautious about expansions because the long life cycles of their projects make their operations less sensitive to short-term price fluctuations. Still, some are seeking to benefit from higher prices by operating existing assets more intensively, with only marginal additions to capital budgets,” the bank said.
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“In contrast, conventional oil producers have responded more quickly to elevated oil prices than other producers, as their shorter production cycles allow them to capitalize on periods of elevated prices.”
In other parts of the country, elevated oil prices tended to weigh on business activity, the bank said, “reflecting heightened uncertainty and the negative effects of elevated fuel costs on household spending and business demand.”
There were several bright spots in the survey.
The outlook for exports improved “to well above the historical average,” the bank said, with fewer businesses saying that trade tensions with the U.S. are holding back sales. Strong commodity prices and American demand for goods and services tied to the build-out of artificial intelligence data centres is also supporting export outlooks.
Meanwhile, company investment intentions were broadly unchanged from the last quarterly survey, but remain at a high level, the bank said.
High commodity prices are boosting investment in the natural resources sector, while more companies are looking to make productivity-related investments in equipment and AI integration.
A separate quarterly survey of consumers, conducted in May, found that Canadian households were also feeling the impact of the war in the Middle East.
Households scaled back spending plans in the wake of broader economic uncertainty, continuing trade tensions and expectations that the war would push inflation higher, the bank said.
Consumers increasingly cited energy prices as a source of inflation this quarter; however, more pointed to tariffs and trade tensions as the main driver of inflation.
Consumers also believed they were worse off financially compared with a year ago, but that statistic is little changed compared with the previous quarter.
However, the survey found that job-loss concerns eased among workers in the quarter, particularly among trade-exposed sectors. The reported risk of overall job losses has fallen close to the level recorded before trade tensions began.
While workers in sectors highly dependent on trade between Canada and the United States (sectors where more than 30 per cent of jobs depend on exports to the U.S.) reported lower job-loss concerns compared with last quarter, they remain significantly higher than for workers in non-trade-sensitive sectors.
Despite the improvement, consumers continue to perceive the labour market as weak, citing persistent economic uncertainty and concerns about AI.