The Bank of Canada's Q4 surveys showed a mixed economic outlook, with businesses cautiously optimistic about future sales, while consumers experience improved financial health but growing concerns over the labor market. The latest Business Outlook Survey reveals a modest recovery in business sentiment, with the survey index rising to -1.18 from a revised -2.29 in Q3. While firms anticipate a recovery in sales, the outlook remains subdued, with cost growth expected to ease and selling prices stabilizing in the near term.

As both business and consumer confidence remain tempered by uncertainties-particularly in labor markets and inflationary pressures-the Bank of Canada faces a complex decision at its next rate decision on Jan. 29. The bank's policymakers appear to be on hold after their more aggressive rate cuts compared to their counterparts at the U.S. Federal Reserve, but the Trump tariff threat, if materialized, could prompt Governing Council to consider providing a rate relief to Canadian households and businesses in its normalization process.

Despite spare capacity within most firms, hiring remains restrained, as labor market conditions, though improved from last year, still leave businesses cautious. A key concern is the uncertainty surrounding the new U.S. administration's impact on trade, with many businesses expecting potential trade disruptions to lead to higher input costs.

The Business Outlook Survey estimate for the CPI annual rate in two years stands at 2.5% vs. 2.5% in Q3 but the bank's monthly Business Leaders' Pulse estimate climbed to 2.6% in December from 2.4% in September.

On the consumer front, the Q4 survey Canadian Survey of Consumer Expectations showed improving financial health, largely due to recent interest rate cuts and expectations of more to come. This has lifted consumer sentiment overall. However, confidence in the labor market has weakened, particularly among younger consumers and those with lower levels of education.

Inflation expectations have largely returned to historical norms, with the CPI annual rate projected at 2.97% in two years, down from 3.05% in Q3. Yet, consumer uncertainty about inflation's direction remains elevated.

The Bank of Canada's (BoC) publishes a quarterly Business Outlook Survey based on a summary of interviews conducted by the Bank's regional offices with the senior management of about 100 firms, selected in accordance with the composition of Canada's gross domestic product (GDP). The survey's purpose is to gather the perspectives of these businesses on topics of interest to the central bank (such as demand and capacity utilisation) and their forward-looking views on economic activity. Since the BoC is charged with keeping inflation within a specified target range, information on price pressures is watched particularly closely.

The outlook survey is used to evaluate economic conditions prior to four Board meetings a year where the BoC sets interest rate policy. Although monetary policy is announced eight times a year, these reports are available only on a quarterly basis. Market participants speculate for weeks in advance about the possibility of an interest rate change that could be announced upon the end of these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.

If the survey portrays an overheating economy or inflationary pressures, the Bank of Canada may be more inclined to raise interest rates in order to moderate the economic pace. Conversely, if the survey portrays economic difficulties or recessionary conditions, the Bank of Canada may see the need to lower interest rates in order to stimulate activity.