The latest Business Outlook Survey indicator further deteriorated to minus 2.42 in the second quarter from minus 2.12 the previous quarter, based on interviews conducted between May 8 and 28.

Unsurprisingly, tariffs and related uncertainty continue to impact Canadian businesses' outlook. Concerns over the direct impact of tariffs have eased slightly, but businesses worry about impacts of tariffs on the global economy and demand in Canada. In fact, near-term sales expectations have weakened due to tariffs.

In turn, businesses are cautious about hiring and investment while maintaining current staff levels, with wage growth expectations continuing to trend lower.

Still, fewer firms than the previous quarter expect adverse impacts from tariffs. The share of firms planning for a recession has declined to 28 percent in the second quarter from 32 percent in the first quarter. The outlook has even improved among firms strongly exposed to trade tensions. The report pointed out that most exporters surveyed by the Bank of Canada were not being subject to tariffs. But those facing tariffs, including steel, aluminum and auto manufacturers, are still reporting weak outlooks.

On the inflation front, while firms expect tariffs to push up input prices, this isn't expected to accelerate the pace of growth of selling prices due to competitive pressures. Reduced margins are the primary channel for absorbing cost increases. Companies are also seeking efficiencies.

Overall, on the inflation front, businesses' short-term expectations have eased based on the Business Leaders' Pulse. However, two-year expectations are still going up based on the BOS survey. The sister survey of consumers shows that while motor vehicle prices are expected to increase markedly over the next year, consumers' inflation expectations for essential goods and services have declined compared to the first quarter. The survey also points to weakening spending intentions. Consumers cited economic uncertainty, high housing costs and high prices generally.

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.