The Canadian economy is poised to experience its most severe shock since the Covid-19 pandemic and could likely slip into a recession if a tariff war continues, top economists warn, with one describing it as an “existential threat.”
President Donald Trump’s decision to impose 25% tariffs on most Canadian imports, coupled with Prime Minister Justin Trudeau’s plan to retaliate with tariffs on C$155 billion ($105 billion) worth of U.S. goods, is expected to slash real gross domestic product (GDP) growth by 2 to 4 percentage points, according to economists’ estimates.
For an economy that was initially forecasted to expand by 1.8% in 2025, the tariffs could trigger the first annual contraction in 16 years, excluding the pandemic. Economists also predict that consumer prices will rise faster than the Bank of Canada’s 2% target, unemployment will increase, 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 anticipate a “sharp negative reaction” in North American equity markets, with the loonie potentially dropping to 65 US cents. They warn that the economy is likely to enter a recession if tariffs persist for five to six months, with a prolonged trade conflict worsening the contraction. The unemployment rate could surpass 7% if the situation escalates further.
“It is premature to estimate the central bank response,” they said.
Bank of Montreal
Chief Economist Douglas Porter stated that US tariffs and Canada’s counter-levies could lower Canadian GDP growth by about two percentage points. He cautioned that “if the announced tariffs remain in place for one year, the economy would face the risk of a modest recession.”
Based on the tariff developments, Porter anticipates the Bank of Canada will cut its policy rate by a quarter point at each meeting until October, before holding steady at 1.5%.
Canadian Imperial Bank of Commerce
Chief Economist Avery Shenfeld warned that a permanent, two-way trade war would be a “recessionary shock for Canada.” While a weaker loonie, along with monetary and fiscal stimulus, could support a recovery, the losses from trade would result in 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,” Shenfeld said.
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 indicate 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 cause the Canadian economy to contract by 2% this year, with headline inflation rising to 2.7%. She anticipates job losses across industries such as manufacturing, tourism, and transportation as higher prices decrease demand. Prices for fruits and vegetables are expected to rise in the coming weeks, while the cost of appliances and cars will 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.”
