Business sentiment was improving, but Middle East war pushing up costs

Tiff Macklem, Governor of the Bank of Canada, holds a press conference at the Bank of Canada in Ottawa on Wednesday, January 25, 2023.

OTTAWA -- Businesses are beginning to face higher costs related to the war in the Middle East, the Bank of Canada found in its latest quarterly survey of companies.

Based on the business outlook survey conducted from Feb. 5 to 25 — before the U.S. and Israel attacked Iran — the central bank said companies expected improvements in sales growth and investment intentions in the first three months of the year.

However in followup calls in March, many firms reported they were already seeing higher costs due to rising prices linked to the war, while others expected increases in the coming months as costs are passed on by suppliers.

“Results from the March followup calls suggest that the war in the Middle East has prompted significant shifts in sampled firms’ outlooks,” the bank said in its report.

“Most businesses had revised up their expectations for input prices, mentioning specifically fuel, freight, fertilizers and exchange rates.”

The business outlook survey is based on interviews with about 100 firms across the country, while the bank conducted followup calls to 20 firms selected based on their having a high likelihood of being affected by the war.

“Although expectations for higher input prices were prevalent across the 20 firms sampled, changes to selling price expectations were less common,” it said.

“Among firms that had already seen or anticipated higher input prices, the ability to pass on cost increases varied by sector. For example, transportation firms indicated that contracts typically include fuel price adjustment clauses.”

Meanwhile, the bank’s Canadian survey of consumer expectations indicator rose slightly in the first quarter from recent lows, but remained below where it was a year ago before the trade tensions with the U.S. peaked.

However, the Bank of Canada says a special survey conducted after the outbreak of the war suggests most households expect the war to weaken the Canadian economy and raise prices.

“Households expressed concern about the implications of the conflict, and some reported having changed their spending behaviour in response,” the bank said.

“Among respondents, 21 per cent have cancelled or postponed trips, mainly due to increases in travel costs, and 28 per cent have postponed or reduced major spending more broadly.”

BMO senior economist Shelly Kaushik said that given the timing of the survey and the smaller size of the followup in March, it may be too early to judge the impact of the Iran war.

“A pair of decent surveys underscore Canadian consumers’ and businesses’ resilience in the face of significant trade uncertainty,” Kaushik wrote in a report.

“While the Iran war presents a stagflationary risk, the prewar momentum could emerge if/when the conflict is resolved.”

A summary of deliberations from the Bank of Canada governing council’s decision to hold the policy rate steady at 2.25 per cent on March 18 suggested some concern about inflation expectations rising with higher gas costs and stubborn price hikes at the grocery store.

But members also noted that a weaker economy might limit the ability for corporations to pass higher costs from the oil supply shock on to customers, which could limit the overall rise in inflation.

Bank of Canada governor Tiff Macklem has said the central bank is willing to look through a short-term spike in inflation tied to surging gasoline prices, but that it is prepared to act if there were signs inflationary pressures were spreading beyond gas pumps.

The Bank of Canada’s next interest rate decision is set for April 29.

This report by The Canadian Press was first published April 20, 2026.