The third quarter Business Outlook Survey by the Bank of Canada reveals a slight improvement in business sentiment as measured by the survey index that edged up to minus 2.28 from minus 2.40 in the previous quarter based on interviews between August 7 and September 3.

Overall, however, the survey continues to point to subdued outlooks and hiring and investment intentions. The main source of concern remains uncertainty around financial, economic and political conditions, with trade conflict and its spillover effects remaining top of mind.

The findings give room for the Bank of Canada to further cut interest rates, especially after Governor Tiff Macklem recently downplayed the 60,400 increase in September employment.

Despite a gradually improving sentiment, the share of firms planning for a recession in Canada has increased to 33 percent from 28 percent as consumer demand is anticipated to remain weak, as is the housing sector outlook. The sister Canadian Survey of Consumer Expectations found that trade tensions and tariffs are weighing on consumer finances and spending intentions despite a slight improvement.

When it comes to sales abroad, while most exporters report not being currently subject to tariffs, their expectations for export growth are muted, owing to soft U.S. and global demand, along with low energy prices. The outlook is particularly marked amid steel and aluminum exporters currently facing tariffs.

Against this backdrop, investment intentions remain muted and firms mostly plan to invest to replace or repair machinery or equipment rather than boosting productivity and output. Hiring intentions are also muted as most businesses have no plan to hire new employees over the next 12 months.

It is no surprise that wage growth expectations continue to trend lower, especially since firms find it easier to find labor than a year ago. The consumer survey collaborates this finding as it reports a lower likelihood of leaving or finding a job, especially in the public sector.

On the inflation front, even as businesses continue to expect upward pressure from tariffs, inflation expectations for one year ahead are easing, with weak demand limiting firms' ability to pass costs through to customers.

The percentage of firms expecting inflation to top 3 percent has declined to 18 percent from 23 percent, while the proportion expecting inflation between 1 and 2 percent has almost doubled to 21 percent from 12 percent.

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.