The Bank of Canada's latest survey of business and financial leaders reveals that geopolitical risks have overtaken rising trade tensions as the primary downside threat to the Canadian economy. The first-quarter Market Participants Survey, released on Monday, reflects the growing concern over global instability, particularly following the onset of the Iran war in late February.
Survey Details
The survey, conducted from March 25 to April 1, gathered responses from 28 financial market participants, including dealers, banks, asset and pension fund managers, insurers, and researchers. When asked to list up to three downside risks to Canada's economic growth, 82 per cent cited geopolitical risks, compared to 79 per cent who cited increasing trade tensions and 57 per cent who mentioned tightening global financial conditions.
Upside Risks
Conversely, 86 per cent of participants identified easing trade tensions as a top upside risk. Other upside risks included larger-than-expected fiscal stimulus (57 per cent), higher commodity prices, and decreasing geopolitical risks (43 per cent each).
Shift from Previous Survey
In the previous survey, released in February and covering the fourth quarter of 2025, the top downside risks were increasing trade tensions, tightening global financial conditions, and weaker consumer spending. That survey was conducted before the Iran war began, highlighting the shift in sentiment.
Central Bank Outlook
The Bank of Canada's Monetary Policy Report noted that the Middle East conflict, along with U.S. tariff measures and the upcoming Canada-United-States-Mexico Agreement review, has added significant uncertainty to the economic outlook. Governor Tiff Macklem emphasized that the economy's performance over the next three years depends heavily on trade negotiations with the U.S. and the severity of the Iran war.
Macklem has also warned that monetary policy must remain flexible, and the central bank may need to raise interest rates if inflation and high energy prices persist. “There’s no set timeline here. It really depends on the conditions,” he told reporters on April 29.
Recession Probability
Market participants estimated a 25 per cent chance of a recession within the next six months, up from 20 per cent in the previous survey but down from 38 per cent in the first quarter of 2025. A recession is defined as two consecutive quarters of economic contraction.
The survey results come nearly two weeks after Finance Minister François-Philippe Champagne tabled the spring economic update, projecting a $66.9-billion deficit for the 2025-2026 fiscal year, lower than the $78.3-billion deficit projected in the fall budget.
