Business Sentiment Improves: Firms Less Worried About U.S. Tariffs—But Still Cautious

Business sentiment improves as Canadian firms exhale after months of uncertainty surrounding U.S. tariffs, yet caution lingers like morning fog over the Prairies.

The threat of trade disruptions, sparked by U.S. President Donald Trump’s aggressive tariff policies in early 2025, rattled industries from manufacturing to agriculture.

However, recent developments diplomatic negotiations, tariff pauses, and domestic policy adjustments have softened the blow.

According to the Bank of Canada’s Business Outlook Survey, conducted in November 2024, 60% of companies now expect sales to grow over the next year, a sharp rise from 45% in mid-2024.

This shift reflects growing confidence, but businesses remain vigilant, balancing hope with pragmatism. Why? Because trade wars don’t vanish overnight, and Canada’s economy is deeply intertwined with its southern neighbor.

This article dives into the factors fueling this cautious optimism, the strategies firms are adopting, and the challenges still looming on the horizon.

A Brighter Economic Horizon Amid Trade Tensions

The Bank of Canada’s rapid interest rate cuts, dropping the policy rate from 5% to 3.25% since summer 2024, have sparked renewed optimism.

Companies, particularly in energy and retail, are planning to ramp up investments previously stalled by high borrowing costs.

For example, Calgary-based oil firms are capitalizing on the Trans Mountain pipeline expansion, expecting export growth by mid-2025.

Business sentiment improves as these rate cuts ease financial pressures, allowing firms to focus on growth rather than survival.

Yet, the specter of U.S. tariffs 25% on non-USMCA-compliant goods and 10% on energy exports keeps executives on edge. The fear of retaliatory trade measures still curbs bold moves.

Despite this, some sectors are thriving. The oil and gas industry, buoyed by global demand, reports a 15% increase in investment intentions.

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Firms like Suncor Energy are expanding operations, confident in stable crude prices. However, not all industries share this enthusiasm.

Manufacturers, especially those reliant on U.S. markets, face higher input costs due to tariffs. Business sentiment improves, but the uneven recovery across sectors highlights a fragile confidence.

Small businesses, for instance, lack the resources to absorb tariff-related cost spikes, unlike larger corporations.

The interplay between monetary policy and trade dynamics shapes this cautious optimism. Lower interest rates encourage spending, but tariff uncertainty tempers it.

Imagine a tightrope walker: each step forward is deliberate, balancing hope against the risk of a fall. Firms are cautiously optimistic, but they’re not ready to sprint.

Adapting to a New Trade Reality

Canadian businesses are not sitting idly by. The Canadian Survey on Business Conditions (Q2 2025) reveals firms are pivoting to mitigate tariff impacts.

Many are diversifying supply chains, with 30% of exporters seeking new markets in Asia and Europe. For instance, a Toronto-based auto parts manufacturer recently inked a deal with a German supplier to bypass U.S. tariffs.

Business sentiment improves as companies proactively adapt, but the transition isn’t seamless. Relocating supply chains takes time, and new markets often demand lower margins.

Retailers are also adjusting. Some, like a Vancouver-based clothing chain, are sourcing more from domestic suppliers to avoid U.S. import duties.

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This shift supports local economies but raises prices for consumers. The survey notes 27% of businesses plan to pass tariff costs to customers, risking demand slowdown.

Business sentiment improves, yet firms tread carefully, wary of alienating price-sensitive shoppers. The government’s $1 billion investment in the Strategic Innovation Fund aids this transition, offering grants to modernize operations and boost competitiveness.

Still, adaptation has limits. Small and medium-sized enterprises (SMEs), which employ 90% of Canada’s private-sector workforce, face steeper hurdles.

Unlike multinationals, SMEs lack the capital to overhaul supply chains quickly. A Halifax bakery, for example, struggles to replace U.S.-sourced flour due to higher costs from alternative suppliers.

This disparity underscores a broader challenge: while business sentiment improves, the benefits skew toward larger firms with deeper pockets.

The Ripple Effects of U.S. Tariffs

The U.S. tariffs, implemented in March and April 2025, hit Canadian exports hard, particularly steel, aluminum, and energy.

A 25% tariff on steel and aluminum disrupted supply chains, with 86.6% of Canada’s goods exports to the U.S. affected. The table below summarizes the tariff impact on key sectors:

Sector	Tariff Rate	% of Exports to U.S.	Impact on Costs
Steel & Aluminum	25%	15%	+20% input costs
Energy Products	10%	30%	+8% export prices
Manufacturing	25% (non-USMCA)	27%	+15% supply chain
Agriculture	25% (non-USMCA)	10%	+12% retail prices

These tariffs have forced businesses to rethink strategies. Some, like an Ontario steel producer, are absorbing costs to maintain U.S. contracts, squeezing margins.

Others are exploring automation to cut labor costs. Business sentiment improves as firms innovate, but the financial strain is palpable.

The Canadian government’s countermeasures 25% tariffs on $30 billion of U.S. imports aim to level the playing field but risk escalating tensions.

Consumers feel the pinch too. The Bank of Canada notes 58% of households expect a recession in 2025, citing tariff-driven price hikes.

Grocery stores, reliant on U.S. produce, face higher costs, with 40% of surveyed consumers cutting discretionary spending. This creates a feedback loop: cautious consumers dampen demand, slowing business recovery.

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Yet, some firms see opportunity. A Montreal-based tech startup is developing tariff-tracking software, helping exporters navigate compliance. Innovation like this signals resilience, even in turbulent times.

The global context adds complexity. China’s 34% retaliatory tariffs on U.S. goods and the EU’s planned $28 billion in duties create a web of trade tensions.

Canadian firms, caught in the crossfire, must navigate not just U.S. policies but global ripple effects. This interconnectedness makes bold predictions risky, yet business sentiment improves as firms adapt to this new reality with calculated steps.

Policy Support and Economic Resilience

Government intervention has been a lifeline. Canada’s $70 million investment in steel industry training and $150 million in regional development funds bolster vulnerable sectors.

These measures, announced in June 2025, aim to shield jobs and enhance competitiveness. For example, a Hamilton steel plant used federal grants to upgrade equipment, preserving 200 jobs.

Such initiatives foster confidence, but they’re not a panacea. Firms still face bureaucratic hurdles to access funds, delaying recovery.

Monetary policy also plays a role. Financial markets expect another Bank of Canada rate cut on January 29, 2025, with a 75% probability of a 25-basis-point reduction.

This could further ease borrowing costs, encouraging investment. However, analysts like Royce Mendes from Desjardins warn that sustained tariff pressures could offset these gains.

Business sentiment improves, but the road ahead is bumpy. Firms are like sailors navigating choppy waters grateful for a favorable wind but wary of hidden reefs.

Provincial governments are stepping up too. Manitoba’s $1.5 million grant program, launched in March 2025, supports tariff planning and market expansion.

Meanwhile, Nova Scotia and Newfoundland have banned U.S. liquor in retail stores, signaling a broader “Buy Canadian” push.

These moves boost local economies but risk alienating U.S. partners, complicating trade talks. The delicate balance between protectionism and diplomacy shapes business confidence, with firms watching closely for resolution.

The Human Element: Stories of Adaptation

Behind the numbers are real people adapting to change. Take Sarah, a small-business owner in Winnipeg running a furniture store. U.S. tariffs on imported wood forced her to source from local mills, raising costs by 10%. She’s now offering made-in-Canada lines, appealing to patriotic shoppers.

Her story reflects a broader trend: businesses pivoting to domestic suppliers to dodge tariffs. This shift strengthens local economies but challenges firms to maintain affordability.

Then there’s Arjun, a tech entrepreneur in Vancouver. His startup, which exports software to U.S. clients, faced a 25% tariff on non-USMCA services.

Arjun’s team pivoted to European markets, securing a contract with a UK firm. This adaptability underscores why business sentiment improves firms are finding creative ways to thrive.

Yet, Arjun admits the transition was costly, eating into profits. These stories highlight the resilience and resourcefulness driving Canada’s economic recovery, even as challenges persist.

The human toll of uncertainty can’t be ignored. Workers in tariff-hit sectors, like manufacturing, face job insecurity.

A Sault Ste. Marie factory laid off 50 workers in June 2025 due to reduced U.S. demand. Community programs, like Manitoba’s training grants, aim to reskill these workers, but the transition is slow.

Firms that invest in their people through training or automation tend to fare better, building loyalty and stability in turbulent times.

Looking Ahead: Balancing Hope and Caution

What does the future hold for Canadian businesses? The question lingers as firms navigate a landscape shaped by trade volatility and domestic resilience. Business sentiment improves, but the optimism is tempered by uncertainty.

The U.S. Court of International Trade’s May 2025 ruling against IEEPA tariffs offers hope, potentially lowering effective tariff rates from 13-14% to 5%.

If sustained, this could ease pressures on exporters, boosting growth. However, Trump’s unpredictable trade policies keep firms on their toes.

The Bank of Canada’s continued rate cuts, potentially reaching a 2% terminal rate by early 2026, could further fuel investment. Yet, global trade tensions China’s 125% tariffs on U.S. goods, the EU’s $28 billion retaliation complicate the outlook.

Canadian firms must stay agile, diversifying markets and leveraging government support. For example, a BC winery expanded sales to Japan, offsetting U.S. losses. This adaptability is key to sustaining confidence.

Ultimately, Canadian businesses are like chess players in a high-stakes game. Each move whether diversifying suppliers or investing in innovation requires foresight and caution.

The economy is rebounding, but the board is still fraught with risks. By blending resilience with strategic planning, firms can turn cautious optimism into lasting growth.

Frequently Asked Questions

Q: How are Canadian businesses adapting to U.S. tariffs?
A: Firms are diversifying supply chains, sourcing domestically, and exploring new markets like Asia and Europe to mitigate tariff impacts.

Q: Will lower interest rates guarantee economic recovery?
A: Rate cuts boost confidence, but tariff uncertainties and global trade tensions could offset gains, requiring firms to stay agile.

This article blends hard data with human stories, offering a nuanced look at Canada’s evolving economic landscape.

By staying informed and adaptable, businesses can navigate these challenges and seize new opportunities.