Tariff War Likely to Put Canada Into Recession, Economists Say
Randy Thanthong-Knight and Erik Hertzberg
4 min read
(Bloomberg) -- The Canadian economy is set to face the most severe shock since the Covid-19 pandemic and will probably sink into a recession if a tariff war persists, say top economists, with one calling it an “existential threat.”
President Donald Trump’s 25% tariffs on most goods the US buys from Canada and Prime Minister Justin Trudeau’s plan to retaliate on C$155 billion ($105 billion) worth of American-made products will trim real gross domestic product growth by 2 to 4 percentage points, according to economists’ estimates.
For an economy that was projected to grow at 1.8% in 2025, that would imply the first annual contraction in 16 years, outside of the pandemic. Consumer prices are likely to increase at a faster pace than the Bank of Canada’s 2% target, the unemployment rate is expected to rise and the Canadian dollar will weaken further.
Here’s what economists are saying:
Toronto-Dominion Bank
Chief Economist Beata Caranci and Senior Economist James Orlando expect a “sharp negative reaction” in North American equity markets and the loonie, which could drop as low as 65 US cents. The economy will probably go into recession if tariffs are sustained for five to six months. Any longer would deepen the contraction, and the unemployment rate may cross the 7% threshold. “It is premature to estimate the central bank response,” they said.
Bank of Montreal
Chief Economist Douglas Porter said US tariffs and Canada’s counter-levies may reduce Canadian GDP growth by about two percentage points, and “if the announced tariffs remain in place for one year, the economy would face the risk of a modest recession.” Based on the tariff news, he sees the Bank of Canada cutting its policy rate by a quarter point at each meeting until October, then holding at 1.5%.
Canadian Imperial Bank of Commerce
Chief Economist Avery Shenfeld said a permanent, two-way trade war would be a “recessionary shock for Canada.” While a weaker loonie and a mix of monetary and fiscal stimulus could aid a recovery, the losses from trade would mean weaker real output even after a return to full employment. “Our upcoming forecasts are likely to be based on a less damaging scenario that has the tariffs removed at the negotiating table, as there is precedent for that from Trump’s first term.”
Royal Bank of Canada
Chief Economist Frances Donald and Assistant Chief Economist Nathan Janzen said their estimates align with the Bank of Canada’s findings, which found that a 25% increase in tariffs across the board in the US and globally would reduce Canadian GDP by between 3.4 and 4.2 percentage points. “Tariffs are hitting the Canadian economy at a moment during which it is already struggling. Canada is still recovering from a major interest rate shock, and even as the Bank of Canada has cut interest rates by 200 bps, the unemployment rate continues to rise” and “the country is still operating with excess supply and below full capacity,” they said.
Capital Economics
Chief North America Economist Paul Ashworth said the 25% tariffs represent an “existential threat” for Canada, given that goods exports to the US account for nearly one-fifth of its GDP. Even with a further depreciation in the loonie, the levies will hit exports, investment and consumption, resulting in a 2.5% to 3% decline in GDP, he predicts. He believes the Bank of Canada has scope to cut interest rates by at least another 50 basis points, with both fiscal and monetary stimulus limiting the severity of a recession.
Corpay
The loonie and peso are vulnerable to drops exceeding 2% to 3% after trading begins in Asia Sunday evening Toronto time, said Chief Market Strategist Karl Schamotta. “The consequences of an extended trade war within what was — until a few hours ago — one of the world’s most successful economic partnerships are almost too terrible to comprehend, but markets will nonetheless have to begin planning for one,” he wrote after the tariffs were announced.
RSM Canada
Economist Tu Nguyen said the US-Canada tariff war may lead the Canadian economy to contract by 2% this year, with headline inflation rising to 2.7%. She expects job losses across industries including manufacturing, tourism and transportation as higher prices decrease demand. Prices of fruits and vegetables are likely to jump in coming weeks, while prices of appliances and cars would take longer to increase. Canadians will also see fewer American-made products on store shelves.
Independent Institute
“The cost of the taxes put across the border will be borne by consumers in both countries,” said Phillip Magness, an economic historian and senior research fellow at the Oakland, California-based think tank. Canada will raise money with its counter-tariffs, but “that’s usually just passed on to the consumers of the goods, or the tariffs divert consumption patterns away from an import and over to a domestically produced substitute of the same goods at a higher price. One way or another, consumers end up paying a higher price because of the tariffs.”
