The Iran War has cast a long shadow over Canada’s economic outlook, reshaping both inflation expectations and investment strategies. Recent surveys by the Bank of Canada highlight how geopolitical tensions and energy price fluctuations are creating a challenging environment for businesses and consumers alike.
The conflict in the Middle East has led to a notable shift in economic sentiment, with businesses and consumers alike adjusting their expectations in response to rising energy costs and global uncertainty.
Inflation Expectations Surge Amid Geopolitical Tensions
The Bank of Canada’s latest surveys indicate a significant increase in inflation expectations among both businesses and consumers. Some 44 per cent of business respondents anticipated inflation rates exceeding three per cent over the next two years, a sharp rise from the 11 per cent recorded in the previous quarter. This surge is largely attributed to the escalating tensions in the Middle East, which have driven up energy and domestic gas prices.
Consumers have also adjusted their inflation expectations, with two- and five-year forecasts rising to four per cent and 3.4 per cent respectively. The follow-up surveys conducted after a tentative peace deal between the United States and Iran showed a slight easing in these expectations as energy prices began to stabilize.
Investment Plans Ramp Up Despite Economic Uncertainty
Despite the economic uncertainty, Canadian oil producers are seizing the opportunity to boost their investment and production plans. The surge in global energy prices has created a favorable environment for conventional and oil sands-producing firms to increase capital expenditures. This trend is particularly evident in the Prairies, where firms are optimistic about meeting other financial priorities, such as paying dividends and reducing debt.
The Bank of Canada’s surveys also revealed a slight improvement in However, the economic landscape remains complex, with businesses outside the oil and gas sector facing weaker sales outlooks due to rising input costs and geopolitical risks.
New Metrics for a Changing Economic Landscape
In response to the evolving economic environment, the Bank of Canada has introduced two new indicators to better track business activity and price behavior. The activity indicator reflects weaker sales outlooks, while the price indicator highlights expectations of higher inflation and stronger growth in input and selling prices. These new metrics aim to provide a clearer picture of the economic shocks affecting different sectors.
The surveys also showed a decline in business sentiment, with the share of firms planning for a recession in the next 12 months increasing to 17 per cent from 9 per cent. However, this measure remains lower than the levels observed in 2026, suggesting a degree of resilience in the face of ongoing challenges.
As Canada navigates this complex economic landscape, the Bank of Canada’s surveys provide valuable insights into the impact of geopolitical tensions on inflation expectations and investment strategies. The introduction of new metrics further underscores the need for a nuanced understanding of the economic shocks affecting the country.
