Canadian Business Outlook Improves Amidst US Policy Concerns

Canadian firms anticipate enhanced demand and sales in the upcoming year, primarily driven by interest rate cuts. However, concerns persist regarding potential negative impacts from proposed US trade policies.

The Bank of Canada's Q4 business outlook survey indicates a moderate improvement in business sentiment. The business outlook indicator, reflecting prospects under present economic conditions, has risen to -1.18, its highest level in five quarters yet below average.

Rate reductions and expected future cuts have spurred optimism, with only 15% of firms projecting a domestic recession in the coming year, down from 16% in Q3.

The survey was conducted from November 7th to 27th, preceding the bank's latest 50-basis-point cut on December 11th.

US President Donald Trump has announced plans to impose a 25% tariff on Canadian imports upon taking office. A separate online poll conducted by the central bank in December revealed extensive uncertainty among business leaders about the potential fallout of US policies, with 40% anticipating negative effects.

Since June, the bank has lowered rates by a total of 175 basis points to stimulate the economy and alleviate rising unemployment. Prior to policy easing, rates had reached a 20-year high of 5%.

"Firms' investment intentions have become more prevalent and exceed historical averages," states the survey.

However, the bank cautions that uncertainty stemming from US trade policy is hindering investment commitments, with the energy sector potentially being an exception.

Businesses anticipate price increases over the next 12 months, but improved demand will enable them to pass on costs and recover margins.

The survey highlights that a greater-than-usual proportion of firms aim to maintain employment levels, with no significant staff reductions foreseen.

Canada's economy generated nearly four times the number of predicted jobs in December, reaching its highest employment rate in almost two years. However, unemployment remains elevated compared to historical levels.