Trump Tariff Fight Pushes Up Canadian Business Costs as About Half of Consumers Fear Recession: Bank of Canada

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Canada’s trade dispute with the United States is beginning to squeeze businesses and households from different directions. Companies are reporting higher operating costs and renewed uncertainty following the collapse of trade negotiations, while approximately half of Canadian consumers believe the economy could enter a recession within the next year.

The findings come from two Bank of Canada surveys released October 19, 2026, revealing a growing divide between business confidence and household expectations. Although some companies reported improving sales earlier in the summer, the latest tariffs have complicated their outlooks, particularly for exports, investment and pricing.

Meanwhile, Canadian families remain cautious about spending, even as some report stronger personal finances. With inflation running at 3.1% in September and energy costs climbing, the central bank faces an increasingly difficult balancing act between supporting economic growth and containing price pressures.

Canada’s Trade Breakdown Reverses Earlier Business Optimism

Canadian businesses entered the third quarter showing tentative signs of improvement, but that optimism weakened after trade negotiations with Washington collapsed on August 21. The United States imposed new 50% tariffs on approximately $27.6 billion in Canadian goods beginning August 22. Ottawa responded by announcing counter-tariffs of 15%, 25% and 50% on an equivalent value of American products, effective September 8. The measures targeted several industries, including steel, dairy, appliances, agricultural equipment, pulp and paper, and electronics, creating another round of uncertainty for companies operating across the border.

The Bank of Canada’s October 19 Business Outlook Survey captured this change in sentiment. Its main interviews took place between August 6 and September 2, with approximately three-quarters completed before negotiations broke down. Businesses initially reported improving sales prospects and stronger demand, but subsequent responses showed deteriorating confidence, weaker export expectations and greater concern about investment. The central bank emphasized that sentiment remained stronger than during the worst trade tensions of 2025. Nevertheless, the reversal suggests that companies had begun adjusting to an improving environment only to encounter another round of difficult trade decisions.

Canadian Businesses Report Higher Costs Before Customers See Them

One of the most important findings concerns the difference between rising business expenses and the prices consumers ultimately pay. Companies surveyed after the breakdown in trade negotiations were more likely to report higher costs associated with tariffs. They were also more likely to report increases in selling prices. However, the share experiencing higher operating expenses exceeded the share raising prices, indicating that businesses were absorbing at least some of the additional burden rather than immediately transferring every increase to customers.

This distinction matters for companies already operating with limited profit margins. A manufacturer importing components may face higher costs while remaining unable to raise the price of its finished product without losing customers. A retailer dealing with more expensive inventory faces a similar problem if competing businesses continue offering discounts. The Bank of Canada found that these pressures were becoming more widespread after negotiations collapsed, even though the broader quarterly survey initially suggested some moderation. For businesses, the concern extends beyond a single tariff payment. Repeated changes to trade rules complicate supplier agreements, pricing decisions and financial planning, potentially reducing profitability even when sales volumes remain relatively stable.

About Half of Canadians Expect a Recession Within the Next Year

The Bank of Canada’s consumer survey revealed a considerably more pessimistic outlook among households. Approximately half of respondents continued to expect the Canadian economy to enter a recession over the next 12 months. Recession expectations were particularly elevated among people who completed the survey after Canada-U.S. trade negotiations collapsed. The findings show that economic concerns remain widespread despite some improvement in Canadians’ assessments of their personal finances. Many households appear worried that another round of tariffs could weaken employment, increase everyday expenses and undermine economic stability.

The Canadian Survey of Consumer Expectations gathered responses between August 5 and August 27, with additional telephone interviews continuing into early September. Roughly three-quarters of the initial responses were collected before the August 21 breakdown, making the timing particularly important. The central bank observed that respondents interviewed afterward expressed greater concern about future economic conditions. However, recession expectations represent public perceptions rather than an official forecast that Canada will experience a downturn. Their importance lies partly in how such fears influence behaviour. A family worried about future layoffs may postpone replacing a vehicle, renovating a home or taking an expensive vacation, even when current household income remains unchanged.

More Companies Are Preparing to Pass Higher Costs to Consumers

The Bank of Canada found that roughly half of surveyed businesses planned to pass some or all of their additional tariff- and energy-related costs on to customers. That represented an increase from the previous quarter and suggested that companies were becoming less willing or able to absorb financial pressures indefinitely. Some businesses had already raised prices to compensate for earlier cost increases, while others anticipated additional adjustments over the coming 12 months. Consumer-facing companies were particularly interested in recovering profit margins that had been squeezed during earlier periods of rising operating expenses.

However, passing costs along is not always straightforward. Businesses operating in competitive markets risk losing customers if they raise prices faster than their rivals. Retailers, restaurants and manufacturers must balance their need to protect profitability against the possibility of weakening demand. The Bank of Canada reported that competitive pressures continued to limit pricing flexibility for several businesses. This creates an uncomfortable choice: accept lower profits or risk driving customers away. While the survey suggests further price increases could emerge, it does not establish how large those increases will be or whether they will affect every product category equally.

Higher Oil Prices Are Making the Tariff Problem Worse

Tariffs are not the only source of financial pressure affecting Canadian companies. The ongoing conflict in the Middle East has pushed energy costs sharply higher, creating additional expenses for transportation, manufacturing and other fuel-dependent industries. Statistics Canada’s October 19 inflation report showed consumer prices rising 3.1% annually in September, compared with 3.0% in August. Gasoline prices climbed 27.8% from a year earlier, while fuel oil and other fuels increased 57.8%. Across the broader energy category, prices rose 19.0% annually, making fuel a major contributor to the country’s inflation rate.

The effects reach businesses that do not directly import tariffed American products. A food distributor still needs trucks to move inventory, while a manufacturer may face higher shipping charges and operating expenses because of energy prices. Atlantic Canadian households are particularly exposed to fuel oil increases because of the region’s greater reliance on that heating source. Yet not every inflation measure is accelerating. Excluding gasoline, Canadian consumer prices increased 2.2% annually in September, and grocery inflation slowed to 1.7%. The distinction matters because it shows that current price pressures cannot be attributed entirely to tariffs or treated as evidence of economy-wide inflation accelerating at the same pace.

Canadians Feel Financially Stronger but Remain Reluctant to Spend

One of the more surprising findings is that Canadians reported improving personal financial circumstances even while expressing fears about the broader economy. The Bank of Canada’s consumer expectations indicator edged higher during the third quarter, supported by better assessments of household finances and modestly improving labour market perceptions. Respondents reported feeling less likely to miss a debt payment and more confident about accessing credit. Some also attributed improved financial expectations to stronger investment portfolios or greater confidence in their employment situation.

However, those improvements have not translated into stronger spending intentions. The Bank of Canada found that consumer spending plans weakened further from already subdued levels. High prices remained the leading obstacle, while uncertainty over trade relations encouraged households to delay discretionary purchases. During follow-up interviews, Canadians described eating at restaurants less frequently, searching for discounts and choosing lower-priced alternatives. Nearly half believed the most serious economic or inflationary consequences of trade tensions were still ahead. Those respondents were particularly inclined to postpone major purchases. This behaviour illustrates how expectations can influence economic activity even before a feared recession materializes. When households become cautious, businesses relying on discretionary purchases may find it harder to maintain sales growth.

Businesses Are Avoiding New Hires as Canada’s Job Market Weakens

Canadian employers are responding to uncertainty by maintaining smaller hiring plans rather than aggressively expanding their workforces. The Bank of Canada’s business survey found that hiring intentions remained below historical averages, with most participating companies expecting to keep employee numbers unchanged. Many businesses believed their current staffing levels were sufficient to meet anticipated demand. Others were investing in automation, artificial intelligence and productivity improvements, allowing them to expand output without necessarily recruiting additional workers. Companies planning to hire more employees often cited stronger demand associated with natural resources or government spending.

The cautious outlook coincides with weakness in Canada’s labour market. Statistics Canada reported that employment declined by 68,000 positions in September 2026, following a reduction of 42,000 in August. The national unemployment rate increased to 6.5%, while manufacturing employment fell by approximately 13,000 during September. Younger workers were especially affected, with employment among people aged 15 to 24 declining by 48,000. These figures describe broader economic conditions and cannot establish that tariffs caused every job loss. Nevertheless, they provide important context for recession concerns. Households may hesitate to spend when employers appear reluctant to hire, while companies may delay expansion if they expect customers to become more cautious.

Canadian Companies Are Rebuilding Supply Chains to Reduce U.S. Dependence

The trade dispute is encouraging Canadian companies to rethink where they purchase materials, manufacture products and find customers. During special consultations conducted in July and August, the Bank of Canada heard from businesses changing suppliers, sourcing inputs from alternative countries and investing in technology to reduce operating expenses. Some exporters are pursuing opportunities beyond the United States, including aluminum producers entering European markets. Others are adjusting their products to serve different customers or shifting their attention toward domestic demand supported by government procurement.

Not every adjustment represents business expansion. Some companies have reduced production capacity, postponed investments or considered moving operations outside Canada to limit exposure to American tariffs. The steel and automotive sectors have been particularly affected by incentives favouring production in the United States. Ottawa has responded with a $7.5-billion package of additional business and worker support, including financing and initiatives aimed at helping companies diversify. However, government assistance does not eliminate uncertainty about future market access. Many businesses told the central bank that their adjustments could be reversed if tariffs were removed, while others were considering more permanent changes to their operations.

Some Canadian Industries Are Performing Better Than Others

The Bank of Canada’s findings show that the economic effects of trade tensions are uneven. Before negotiations collapsed, exporters reported relatively strong sales prospects supported by American demand. Businesses connected to tourism, professional services, manufacturing and infrastructure investment described areas of opportunity. Natural resource companies also benefited from elevated commodity prices, particularly in oil and gas. Firms involved in infrastructure and defence projects reported support from public spending, while some consumer-facing businesses saw stronger demand for budget-friendly products and services.

Other sectors continued to struggle. Housing-related businesses reported modest improvement, but the central bank characterized the change as stabilization rather than a meaningful recovery. Companies facing direct tariffs or prolonged uncertainty over American market access remained more cautious about investment. The surveys also showed that employment intentions were soft despite improving sales expectations earlier in the quarter. These differences help explain why Canada’s economic outlook cannot be described as uniformly deteriorating. Some industries are benefiting from global demand and public investment, while others are absorbing higher costs, weaker export prospects and competitive pressures. The central question is whether stronger sectors can sustain enough economic activity to offset weakness elsewhere.

The Bank of Canada Faces a Difficult Decision as Inflation Risks Grow

The latest findings arrive shortly before the Bank of Canada’s next scheduled interest rate announcement on October 28, 2026. The central bank maintained its policy rate at 2.25% in September, citing uncertainty surrounding American tariffs and elevated energy prices. Since then, the September inflation rate has reached 3.1%, above the Bank’s 2% target. Policymakers must determine whether the recent increase reflects temporary energy pressures or represents the beginning of more persistent inflation. Higher interest rates could help restrain prices but would also increase borrowing costs for households and businesses facing weaker economic conditions.

There are reasons for caution in both directions. Although approximately half of surveyed consumers expected a recession, the share of businesses actively planning or budgeting for one declined from 17% to just 6% during the third quarter. Those figures measure different expectations, and much of the business survey was conducted before the latest escalation in trade tensions. They should not be interpreted as competing recession forecasts. The October 28 decision will provide another assessment of how the Bank views these changing risks. For Canadians, the stakes extend beyond the next interest rate announcement. The combination of tariff uncertainty, higher operating costs and cautious household spending could influence employment, investment and consumer prices well into 2027.

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