06:35 AM EDT, 04/08/2025 (MT Newswires) -- Canadian business sentiment dropped almost a full point in Q1 to -2.14, reversing five consecutive quarters of improvement, according to the Bank of Canada Business Outlook Survey (BOS) released Monday, noted TD.

The survey was conducted Feb. 6-26, during a volatile stretch, marked by the announcement and temporary pause of United States blanket tariffs on Canadian goods, followed by announcements of Canada's phase 1 retaliatory tariffs.

However, it predates the announcements of U.S. steel and aluminum tariffs and new tariffs on auto imports, suggesting it may understate the full extent of the tariff threat, noted the bank.

Expectations for recession have risen, with 32% of firms now operating under the assumption that Canada will enter an economic contraction over the next year.

According to the parallel Canadian Survey of Consumer Expectations (CSCE), consumers' sentiment also weakened.

Both businesses and consumers lost confidence in Q1, as U.S. tariff threats raised serious concerns about future economic prospects, stated TD. On the business side, based on historical relationships, Monday's drop in future sales expectations and the sizeable reduction in investment intentions point to a much weaker outlook than in the bank's recent forecast for Q1 2025.

With about one-third of firms and two-thirds of consumers now expecting a recession and job loss concerns surpassing pandemic levels, businesses and consumers are shifting in defensive mode, pointed out the bank.

The pullback in consumer spending, which makes up 60% of gross domestic product, will add to the drag from weaker investment spending, though the full effect of tariffs and related uncertainty is unlikely to materialize until Q2, added TD.

One thing Canada's central bank will be watching closely is inflation expectations. Despite the rise in short-term now, there is no evidence of a sharp rise, leaving the door open for another cut in April, according to TD.