The Bank of Canada’s latest quarterly business survey revealed that the Canadian economy faced significant challenges from the recent conflict between the United States and Iran, particularly due to a sharp rise in global oil prices. Conducted between May 1 and May 21, the survey captured a period when benchmark oil prices surged above US$100 a barrel following the closure of the Strait of Hormuz, a critical global shipping route for oil.

This spike in oil prices led many Canadian companies to revise down their sales forecasts and plan for higher selling prices. Nearly 75 percent of firms reported increased input costs linked to the conflict, and about one-third anticipated passing these costs fully onto customers. Business expectations for inflation over the coming two years also rose, with many companies predicting inflation to stay between 3 and 3.5 percent.

However, the market situation evolved quickly after the survey period. In mid-June, a peace agreement between Washington and Tehran reopened the Strait of Hormuz, pushing oil prices down to approximately US$68 per barrel—levels similar to those seen before the conflict began in late February. Follow-up surveys conducted online indicated that inflation expectations among businesses have since declined, reflecting the easing of the supply-side shock.

Bank of Canada Governor Tiff Macklem has stated that, despite the oil price surge contributing to a headline inflation rate of 3.2 percent in May, there has been no clear evidence so far of broader inflation spreading across goods and services. Most financial market participants expect the central bank to maintain its current interest rates at the upcoming July 15 policy decision.

The impact of the oil price shock varied regionally. In the Prairie provinces, companies, particularly in the oil and gas sector, reported strong sales and hiring prospects. Calgary energy firms expressed cautiously optimistic investment plans, with conventional oil producers responding more rapidly to price increases due to shorter project cycles. Oil sands producers were more conservative, focusing on operating existing assets more intensively rather than expanding capital budgets.

Conversely, elevated oil prices weighed on business activity in other parts of the country, as higher fuel costs affected household spending and overall demand amid rising economic uncertainty.

On a positive note, the outlook for Canadian exports improved to well above historical averages. Businesses reported fewer concerns over U.S. trade tensions as a constraint, buoyed by strong commodity prices and growing American demand for goods and services associated with the expansion of artificial intelligence data centres. Investment intentions among companies held steady at high levels, supported by heightened commodity prices and increased activity aimed at productivity improvements through equipment upgrades and AI integration.

A separate consumer survey conducted in May highlighted that Canadian households scaled back their spending amid concerns over inflation, ongoing trade tensions, and uncertainty fueled by the Middle East conflict. Energy costs were increasingly cited as a source of inflation, though tariffs and trade disputes remained the primary concerns. While many consumers felt financially worse off compared with the previous year, job-loss worries eased, particularly in sectors heavily exposed to U.S. trade, though these concerns remained elevated relative to less trade-sensitive industries.

Despite softening job-loss fears, overall consumer sentiment pointed to a cautious view of the labour market, shaped by persistent uncertainty around economic conditions and potential disruptions from advancing technologies like AI.