The US and Canadian flags fly near the Blue Water Bridge linking the United States and Canada. — AFP
TORONTO: 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 United States buys from Canada and Prime Minister Justin Trudeau’s plan to retaliate on US$105bil worth of American-made products will trim real gross domestic product (GDP) growth by two to four 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.
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 United States 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 basis points, the unemployment rate continues to rise” and “the country is still operating with excess supply and below full capacity,” they said. — Bloomberg
