Canadian businesses were reporting a brighter outlook in February, according to a Bank of Canada quarterly survey, but a targeted follow-up of firms exposed to the Iran conflict signalled rising concern about input costs. The initial poll was conducted across 100 firms between Feb. 5 and Feb. 25, prior to the war that began on Feb. 28.
The Bank carried out a March survey of 20 firms it judged likely to be directly affected by the conflict. In that smaller sample, many companies said they had lifted expectations for input prices, naming fuel, freight, fertilizers and exchange rates specifically as sources of upward pressure.
"Most businesses had revised up their expectations for input prices, mentioning specifically fuel, freight, fertilizers and exchange rates," the Bank reported.
Firms operating in fuel-intensive areas - including agriculture, oil and gas, manufacturing and transportation - have already registered higher input costs, the survey said. Other firms do not yet report higher inputs but anticipate increases as suppliers pass along added costs in the months ahead.
Bank of Canada Governor Tiff Macklem was quoted last week as saying he was not worried about a near-term spike in inflation expectations caused by the conflict. Still, the survey's business outlook indicator - a measure of firms' views under current conditions - climbed to -0.36, the strongest reading since the fourth quarter of 2022.
Monitored closely by the Bank and economists alike, the survey offers signals on both inflation trends and recession risk. Money markets are pricing in a single 25 basis point rate hike later this year, reflecting expectations that are shaped in part by the survey's findings.
Trade relations with the United States, which had been strained by tariff actions, appear to be weighing less heavily on firms' minds, the survey noted, and forward-looking sales expectations have reverted to their historical average.
On investment and labour, more firms than in recent quarters said they are directing capital toward productivity improvements and capacity expansion rather than routine maintenance. Nearly half of the surveyed firms expect to increase headcount over the next year.
A separate consumer survey conducted by the Bank showed five-year inflation expectations fell to 3.02% from 3.09% in the fourth quarter, indicating a modest easing in household long-run inflation outlooks.