Middle East conflict jolts energy prices, squeezing Canadian growth, and testing Bank of Canada policy
War‑driven oil shock has pushed a former Bank of Canada governor to put the odds of a Canadian recession at about one in three.
Stephen Poloz says Canada faces “about a 30 percent chance” of falling into recession as the war in the Middle East disrupts energy markets and compounds existing headwinds, according to BNN Bloomberg.
He said growth in Canada is only about one percent and the economy is still “digesting” US President Donald Trump’s tariff regime.
Poloz told CTV Question Period that “it’s not about somehow avoiding all that. Then on top of that, we’ve got this oil shock.”
As reported by the same outlet, he suggested a change to the tax structure on gasoline as “a mitigant, a short‑term kind of offset,” but argued that “for the Trump tariffs, what we need is to find replacements, as opposed to offsets.”
He pointed to expanding the conventional energy sector and boosting the homegrown defence industry as possible responses.
Poloz said the ongoing war in the Middle East — with blockades in the Strait of Hormuz and damage to production facilities — is taking a “striking toll” on the global economy, sending fuel prices higher and raising the risk of a global energy crisis.
He cited the International Monetary Fund’s latest World Economic Outlook, which lays out base, adverse and severe scenarios. Poloz said it appears the global economy is veering into adverse territory but could return to the base case if the conflict in the Middle East winds down soon.
The IMF warned the global economy could come close to experiencing a recession if the conflict persists and wrote that “the downside risks are tremendous.”
For Canada, Poloz said the oil shock gives the economy some protection but also creates deep internal strains. He told CTV that Canada may be “a little bit luckier than others” because it produces and exports oil, but warned that this only softens, rather than prevents, a potential recession.
He likened the country to having “our head in the oven and our feet in the freezer,” with wide divergences between sectors, households and companies, and across regions.
Survey data from the Bank of Canada show how those pressures are feeding through.
Reuters reported that the bank’s quarterly business outlook survey of 100 firms conducted between Feb. 5 and 25 found that Canadian business sentiment had started to rise before the Iran war, pushing the business outlook indicator up to -0.36, the highest since the fourth quarter of 2022.
The same report said trade tensions between Canada and the US, which had been fanned by tariffs, were weighing less heavily and that future sales outlooks had returned to their historical average.
More firms were focusing investments on increasing productivity and expanding capacity, and nearly half anticipated hiring more staff over the next year.
After the war started, the Bank of Canada conducted a follow‑up survey of 20 firms it expected to be most exposed.
Reuters said most businesses revised up their expectations for input prices, “mentioning specifically fuel, freight, fertilizers and exchange rates.”
Firms in fuel-intensive sectors such as agriculture, oil and gas, manufacturing and transportation had already reported higher input costs, with others expecting increases as suppliers passed on costs.
In its own report on the same survey, BNN Bloomberg said the Bank of Canada found companies initially expected improvements in sales growth and investment intentions in the first three months of the year, based on the February interviews.
Follow‑up calls in March showed many firms were already seeing higher costs linked to the war, while others expected increases in coming months.
The bank noted that expectations for higher input prices were prevalent across the 20 firms, but changes to selling price expectations were less common, and that the ability to pass on costs varied by sector; transportation firms, for example, often have fuel price adjustment clauses.
On the household side, Reuters reported that a separate Bank of Canada survey showed expectations for five‑year inflation fell to 3.02 percent from 3.09 percent in the fourth quarter.
According to BNN Bloomberg, the bank said its Canadian survey of consumer expectations indicator rose slightly in the first quarter from recent lows but remained below where it was a year earlier, before trade tensions with the US peaked.
A special survey conducted after the outbreak of the war found most households expected the conflict to weaken the Canadian economy and raise prices.
Among respondents, 21 percent had cancelled or postponed trips, mainly because of higher travel costs, and 28 percent had postponed or reduced major spending more broadly.
Policy makers are signalling they will tolerate some of this volatility.
Reuters said Bank of Canada governor Tiff Macklem was not concerned about the near‑term spike in inflation expectations due to the war.
As reported by BNN Bloomberg, the bank said its summary of the governing council’s March 18 decision to keep the policy rate at 2.25 percent warned that rising gas and grocery prices risk lifting inflation expectations, even as weak growth may limit companies’ ability to pass on higher oil‑related costs.
The same article reported that Macklem has said the bank can tolerate a brief inflation surge linked to gasoline, but will step in if price pressures spread beyond fuel.
The federal government has leaned on a more optimistic angle from the IMF.
The Liberals have highlighted IMF data forecasting that Canada will be the second‑fastest growing economy in the G7 by next year.
Finance Minister François‑Philippe Champagne called that a reason to “celebrate a bit,” while Secretary of State (CRA and Financial Institutions) Wayne Long told CTV Question Period the government is focused on growing the economy and left open the possibility of further measures to address affordability.
