Bank of Canada quarterly report shows less pessimism from businesses, but workforce headcounts still at risk
Canadian businesses are entering 2026 with subdued confidence, modest growth expectations and a mindset towards holding the line – or cutting – on staffing, according to the Bank of Canada’s latest Business Outlook Survey.
For senior HR leaders, the message is that many employers are planning for a slow year, with workforce expansion taking a back seat to risk management and cost control.
The central bank’s fourth-quarter 2025 survey, based on interviews conducted from Nov. 6 to 26, finds business sentiment is still weak, though no longer at the low point reached in the middle of 2025. After a soft year, firms expect domestic sales to improve slightly, while export growth is anticipated to remain modest.
The report stresses that trade tensions continue to weigh heavily on both sales and staffing decisions. It points to a broad reluctance to expand headcount, with most businesses intending to keep staffing where it is or reduce it, rather than add workers. More than half of respondents indicated that layoffs are more likely than new hiring.
Economic, political uncertainty limiting optimism
Businesses also continue to see trade-related risks as a central challenge. The Bank of Canada notes that uncertainty tied to tariffs and broader economic and political conditions, along with slowing demand and cost pressures, remains among the most frequently cited concerns for firms.
At the same time, some exporters that already engage in non-US markets are shifting sales away from there towards those other markets, in direct response to ongoing trade tensions and tariffs, with nearly one in 10 exporters saying they had slightly increased sales to non-US markets.
There are signs that the mood, while fragile, isn’t as grim as it was earlier in 2025. The Bank reports that the proportion of businesses planning or budgeting for a Canadian recession over the next year has fallen from 33 per cent to 22 per cent, the lowest reading of the year, although still higher than in 2024.
Even so, those marginally better expectations are not yet translating into aggressive expansion:
- Firms describe past sales growth as weak, largely because of the economic fallout from the trade conflict.
- Looking ahead, they expect only slight improvement in sales, and continue to characterize export prospects as “modest.”
That combination — reduced recession fear but tepid growth — typically leads organizations to protect margins through restraint on hiring, discretionary spending and wage growth.
Investment focused on maintenance, not growth
The survey suggests that companies are spending, but cautiously and with an eye on preservation rather than growth. Investment intentions have firmed somewhat, yet businesses are directing much of this spending toward routine maintenance instead of ambitious expansion projects.
Trade‑related uncertainty and tariffs continue to dampen confidence and encourage firms to delay or scale back larger capital projects. The spillover effects are visible in reduced spending on services such as construction, advertising and insurance, as companies postpone decisions in the face of unpredictable policy and market conditions.
On the inflation front, the Bank finds that businesses’ expectations for price growth over medium‑term horizons remain clustered between 2.5 and three per cent. Tariffs and trade policies are still the main drivers of those expectations, though fewer firms highlighted them this quarter compared with earlier in the conflict.
In December 2025, the inflation rate in Canada was 2.4 per cent — an increase from 2.2 per cent in November, according to Statistics Canada.
Inflation concerns
More companies are now pointing to higher government spending as a factor behind expected inflation. For compensation planning, the Bank of Canada suggested that there would be:
- Continued upward pressure on some input and wage costs.
- Limited pricing power in a soft demand environment, making it harder to pass along higher labour costs to customers.
This tension is likely to sustain employer pushback on wage demands in sectors facing weak or uncertain demand, even as employees contend with lingering cost‑of‑living concerns.
