The Bank of Canada reported that the Iran conflict negatively impacted business confidence and led to a surge in inflation expectations, as per the latest business outlook surveys released on Monday. To address the economic effects of these challenges, the central bank introduced new metrics to monitor sales and pricing trends in an increasingly unpredictable environment.
According to the recent surveys, input costs and geopolitical uncertainties rose in the past three months, affecting sales projections for most firms outside the oil and gas sector in the Prairies. The percentage of businesses anticipating a recession within the next year increased to 17%, nearly double the previous quarter’s figure. However, this remains lower than levels observed in 2025.
On a positive note, businesses reported reduced uncertainty related to trade disruptions with the United States, leading to improved export prospects fueled by higher commodity prices and demand for artificial intelligence inputs. Inflation expectations among businesses surged in the second quarter due to heightened energy prices associated with the Middle East conflict, reaching a four-year high, as indicated by the central bank.
Consumer spending intentions dipped in the previous quarter, especially among households concerned about potential price hikes linked to the Middle East tensions. These cautious consumers adjusted their behavior by seeking discounts, cutting back on driving, and delaying significant purchases.
The Bank of Canada is now tracking firms’ sales, hiring, and investment expectations separately from input costs, selling prices, wages, and inflation. This shift aims to better capture the diverging impacts of economic shocks, such as the Iran war, on these different aspects. The central bank is expected to maintain its benchmark interest rate at 2.25% in the upcoming decision on July 15, considering the evolving economic conditions.