The Bank of Canada’s latest Business Outlook Survey shows that corporate sentiment improved during the third quarter of 2026, but gains have been partially eroded by the recent collapse of Canada‑US trade negotiations and the imposition of new tariffs and counter‑tariffs.
Sentiment shift after trade talks
Most survey responses were gathered before talks between Ottawa and Washington broke down on Aug. 21. Results collected since Aug. 22 indicate that firms surveyed after the breakdown reported noticeably weaker sentiment and lower expectations for export sales than those surveyed earlier in the quarter. While the deterioration is meaningful, the Bank notes that sentiment and expectations remain substantially stronger than at the height of trade tensions in 2025 — suggesting a moderation rather than a full reversal of recent improvements.
Capacity and labour: excess but tightening
The survey shows that companies still report overall excess capacity, but that slack has narrowed slightly. Most firms continue to say their current physical capacity and workforce are adequate. However, the share of firms indicating they would struggle to meet an unexpected rise in demand has risen to its historical average. That increase stemmed mainly from firms anticipating some difficulty; only a small number expected significant trouble.
- More firms cited physical capacity constraints and supply‑chain disruptions as sources of pressure.
- A larger share reported that finding labour has become harder compared with a year earlier, though reports of binding shortages remain below historical levels.
- Shortages were most often concentrated in skilled trades and specialised technical roles; some firms pointed to recruitment challenges in rural areas and changes to immigration policy as contributors.
Inflation expectations edge up
Responses collected after the trade negotiations faltered also show higher inflation expectations, which the Bank links to rising oil prices and the imposition of tariffs. Despite the uptick, expectations have not returned to the elevated levels seen at the onset of the trade conflict in early 2025 or around peak oil price episodes.
| Period | Survey signal |
|---|---|
| Before Aug. 22, 2026 | Improved outlooks for domestic and export activity |
| Since Aug. 22, 2026 | Weaker sentiment; lower export expectations; higher inflation expectations |
Implications for policy and business planning
The Bank of Canada’s findings highlight two tensions for policymakers and corporate managers. First, the economy is not operating at full capacity — providing some room to absorb shocks — yet businesses are increasingly signalling pockets of constraint in physical capacity, supply chains and skilled labour. Second, trade policy volatility can quickly affect expectations and external demand outlooks even when underlying conditions remain better than last year’s worst points.
For firms, the survey suggests a cautious approach to investment and hiring will persist in the near term. Companies facing recruitment issues in specific trades and technical roles may escalate skills‑training, relocation incentives or targeted immigration recruitment. For policymakers, the mix of rising inflation expectations and still‑present capacity slack presents a delicate calibration: inflation pressures have reappeared, but binding capacity shortages are not widespread.
Overall, the third‑quarter survey paints a picture of an economy that was on a modest upswing before trade developments intervened. The immediate impact of the tariff dispute has been to temper optimism and lift price expectations — outcomes that will be watched closely by businesses, markets and policymakers over the coming months.
