Canada’s economy is showing signs of improvement, but many households are preparing for something worse. Nearly half of Canadians believe a recession could arrive within the next year, according to new Bank of Canada findings released October 19, 2026.
The central bank’s latest consumer survey reveals growing concern about inflation, trade tensions with the United States and the possibility that the most serious economic disruptions have yet to arrive. Long-term inflation expectations are rising, while Canadians are becoming increasingly cautious about major purchases.
The results present a complicated picture. Some households feel more financially secure than they did three months ago, yet confidence in the broader economy remains fragile. With American tariffs threatening Canadian businesses, energy prices remaining elevated and another Bank of Canada interest-rate decision approaching, economic uncertainty is influencing how Canadians spend, save and plan for the future.
Nearly Half of Canadians Believe a Recession Is Coming
The Bank of Canada’s third-quarter Canadian Survey of Consumer Expectations found that approximately half of respondents anticipate a recession within the next 12 months. The findings reflect persistent concern about Canada’s economic outlook despite modest improvements in household financial confidence. Survey data show that 18.85% of respondents expect a significant economic decline, while another 34.21% anticipate a smaller contraction. Combined, slightly more than half foresee some form of economic deterioration rather than growth or stability.
The results are particularly notable because consumer sentiment had improved slightly compared with the previous quarter. The Bank’s overall confidence indicator edged higher, supported by better perceptions of personal finances and employment prospects. However, that improvement has not translated into widespread optimism about the national economy. A household may feel comfortable paying its bills today while worrying that layoffs, tariffs or higher prices could create problems tomorrow. Importantly, the survey measures expectations rather than predicting an actual recession. Consumer pessimism is a warning sign, not confirmation that an economic contraction will occur.
The Collapse of U.S. Trade Talks Deepened Economic Anxiety
Canada’s deteriorating trade relationship with the United States is a major source of concern. The Bank of Canada’s consumer survey ran from August 5 to August 27, 2026, placing its final days immediately after negotiations between Ottawa and Washington broke down on August 21. Approximately three-quarters of responses were collected before that development, giving researchers an opportunity to compare expectations before and after the announcement. Respondents surveyed afterward reported slightly higher inflation expectations across every measured time horizon.
Follow-up interviews conducted between August 24 and September 4 reinforced those concerns. Some participants expected the breakdown in negotiations to lead to additional tariffs and higher prices for everyday purchases. The findings do not prove that the announcement alone caused the change, but they reveal how quickly perceptions can shift when international trade becomes uncertain. For workers and businesses connected to American customers, the possibility of additional duties can complicate decisions about employment, investment and spending. Even without immediate job losses, uncertainty about future trade conditions can encourage households to become more cautious.
Long-Term Inflation Expectations Jump to 3.91%
One of the most concerning developments involves how Canadians view inflation several years into the future. The Bank’s detailed survey data show that five-year inflation expectations increased to 3.91% in the third quarter, up from 3.39% three months earlier. Expectations for inflation over the next year remained elevated at 4.03%, while the two-year measure stood at 3.88%. The notable change was therefore concentrated in longer-term expectations rather than a broad quarterly surge across every measure.
The distinction matters for monetary policy. The Bank of Canada aims to maintain inflation near 2%, the midpoint of its 1% to 3% target range. When consumers expect prices to rise substantially faster for an extended period, their financial decisions can change. Workers may seek larger wage increases, businesses may adjust pricing strategies and households may alter borrowing or purchasing plans. Expectations alone do not establish that future inflation will reach those levels. However, their persistence can make restoring confidence in price stability more difficult, particularly when Canadians believe international trade disputes and energy costs will remain unresolved.
Gasoline Prices Are Making Inflation Harder to Ignore
Fresh inflation figures help explain why Canadians remain concerned about living costs. Statistics Canada reported that the Consumer Price Index increased 3.1% year over year in September 2026, compared with 3.0% in August. Gasoline prices were a major contributor, rising 27.8% from September 2025. Fuel oil and other fuels became 57.8% more expensive over the same period, creating additional pressure in regions where households depend on oil for heating.
Not every category experienced the same acceleration. Inflation excluding gasoline was 2.2%, down from 2.4% in August, while grocery prices increased 1.7% year over year. Those figures suggest that much of the latest headline inflation pressure remains concentrated in energy. Nevertheless, slower grocery inflation does not mean food has become inexpensive. Statistics Canada reports that grocery prices have increased 33% since September 2020. For families managing weekly shopping, commuting and heating expenses, those accumulated increases matter. They help explain why consumers can remain frustrated about affordability even when the annual inflation rate for certain products begins to moderate.
Canadians Feel Slightly Better Financially but Remain Cautious
The survey offers an important counterpoint to widespread recession concerns. Canadians reported modest improvements in their personal financial health during the third quarter. Respondents perceived easier access to credit and a lower likelihood of missing debt payments. The average estimated probability of missing a required debt payment over the next three months fell to 5.29%, compared with 7.37% in the previous quarter. Some households also credited stronger financial asset values and improved employment confidence for their more positive outlook.
Those improvements do not necessarily mean financial pressure has disappeared. Households with investments may benefit from rising asset values, while families with limited savings remain more exposed to unexpected expenses. The Bank’s overall consumer confidence indicator also remains relatively weak despite its quarterly improvement. This creates an apparent contradiction: people feel somewhat better about their finances but continue anticipating serious economic difficulties. The difference is understandable. Personal financial stability depends on current income, assets and debts, whereas recession expectations reflect uncertainty about future employment, business conditions and the wider economy.
Canada’s Labour Market Is Sending Mixed Signals
Employment conditions help explain why Canadians are hesitant to embrace a more optimistic economic outlook. Statistics Canada’s September Labour Force Survey reported a decline of 68,000 jobs, following a decrease of 42,000 in August. The unemployment rate increased to 6.5%, up from 6.4% the previous month. Manufacturing employment fell by approximately 13,000 positions in September, while employment among young Canadians aged 15 to 24 declined by 48,000. These figures highlight vulnerabilities beneath the country’s broader economic recovery.
The Bank of Canada’s consumer survey nevertheless found slightly improved labour-market perceptions during the third quarter. Respondents expressed greater confidence in finding another job and a somewhat higher likelihood of voluntarily changing employment. However, concerns about job loss also increased modestly. Workers in industries heavily connected to American trade reported improved perceptions earlier in the quarter, although uncertainty about tariffs remained significant. Some resource-sector employees benefited from strong commodity markets. Others faced less encouraging conditions, particularly in industries where artificial intelligence may replace certain tasks. The findings show why employment confidence can improve in one sector while deteriorating in another.
More Households Are Delaying Purchases and Cutting Spending
Canadians are responding to uncertainty by becoming more selective about their spending. The Bank’s latest survey shows that expected household spending growth over the next 12 months declined to 3.35%, compared with 3.75% in the previous quarter. Approximately 59% of respondents reported cutting spending or postponing major purchases because of their inflation expectations. Others described looking for discounts, selecting cheaper alternatives and dining out less frequently to keep household budgets manageable.
The shift is particularly important for businesses relying on discretionary purchases. The share of consumers planning to buy a vehicle within six months declined from 11.17% to 10.14%. Nearly half of respondents also believe the most serious economic or inflation-related effects of trade tensions are still ahead, making them more reluctant to commit to significant expenses. A postponed vehicle purchase or home renovation may seem like a small individual decision, but similar choices across thousands of households can weaken retail demand. Lower consumer spending may then influence business hiring and investment, potentially reinforcing the slowdown people already fear.
Canadian Businesses Are Less Pessimistic Than Consumers
The Bank of Canada’s separate Business Outlook Survey presents a more encouraging assessment, although its results require careful interpretation. The share of firms planning or budgeting for a recession over the next year declined to 6%, compared with 17% in the previous quarter. Business sentiment improved overall, supported by stronger sales expectations, resilient American demand and favourable commodity prices. These findings contrast with the approximately half of consumers who expect an economic downturn.
The two measures are not directly comparable. Households were asked about their expectations for the national economy, while businesses reported whether they were planning or budgeting for recession conditions. Timing also matters. Most business interviews occurred before Canada–U.S. negotiations collapsed, and later responses showed renewed deterioration in sentiment. Export expectations and investment outlooks weakened after new trade measures were announced. Most firms still planned to maintain existing staffing levels rather than significantly expand employment. The results suggest that businesses are not uniformly preparing for a recession, but neither are they confident enough to pursue aggressive hiring or expansion across the economy.
Businesses Warn That Tariffs Could Push More Costs Onto Consumers
The Bank’s business findings also explain how trade disputes can eventually reach Canadian household budgets. Approximately half of surveyed firms said they intended to pass some or all of their larger-than-normal cost increases related to tariffs and Middle East disruptions onto customers. Several companies reported that previous increases had already reduced profit margins, leaving them considering further adjustments to selling prices. However, competitive pressures continued to prevent some businesses from recovering their full additional costs.
Companies are also looking for ways to reduce their exposure. Some manufacturers have changed suppliers or sought inputs from countries facing fewer trade barriers. Others are investing in automation, exploring new export markets or reconsidering production locations. The Bank identified examples of aluminum businesses entering European markets and steel producers pursuing domestic opportunities. More concerningly, some firms in the automotive and steel industries reported scaling back Canadian investment or considering expansion outside the country. Such adjustments could weaken Canada’s productive capacity if they become permanent. For consumers, the immediate concern is higher prices; for workers, it is whether investment and employment opportunities will remain in Canada.
The Bank of Canada Faces a Difficult Interest-Rate Decision
The combination of weak consumer confidence and elevated inflation expectations creates a challenge for the Bank of Canada. On September 2, the central bank maintained its policy interest rate at 2.25%, acknowledging both the economic uncertainty created by renewed tariffs and the inflation risks associated with high energy prices. Its next scheduled interest-rate announcement is October 28, when policymakers will also release updated economic forecasts. The decision will depend on whether price pressures appear likely to persist or spread more widely through the economy.
Higher interest rates can discourage borrowing and spending, helping contain inflation, but they can also create additional pressure for mortgage holders, businesses and consumers already worried about economic growth. Lower rates may provide relief to borrowers while potentially increasing demand before inflation has returned to target. The Bank cannot directly resolve trade negotiations or global energy disruptions, making its choices especially difficult. For Canadians, the coming months will test whether improving household finances can withstand continued uncertainty. The latest findings do not establish that a recession is inevitable, but they show that restoring confidence will require more than a temporary improvement in economic indicators.
