Regardless of tariffs piling up over the previous few months, economists say there are few indicators of financial collapse — although Canada’s economic system is beginning to present cracks.
TD Financial institution economist Marc Ercolao conceded it’s a “bit of surprise” to see the economic system holding up towards a large disruption from Canada’s largest buying and selling associate.
“Many months ago, ourselves — as well as other economic forecasters — had an outlook for a much weaker Canadian economy. Obviously, that isn’t manifesting now,” he stated in an interview.
“We are avoiding the worst-case scenario.”
Final week, Financial institution of Canada governor Tiff Macklem stated Canada’s economic system is holding up underneath the burden of U.S. tariffs with “some resilience.”
Only a few days later, U.S. President Donald Trump added 35 per cent tariffs on Canadian items to a working tally that features hefty duties on metal, aluminum, vehicles and, extra lately, semi-finished copper.
On Thursday, Statistics Canada gave a glimpse at how the economic system wrapped up the second quarter of the yr when lots of these tariffs got here into full impact.
The company sees a few small contractions in actual gross home product (GDP) by business in April and Might, however its flash estimates present the economic system rebounding considerably in June.
If these early readings pan out, Statistics Canada stated that might be ok for flat development total on the quarter.
A few of these outcomes are distorted by volatility — companies dashing to get forward of tariffs boosted exercise within the first quarter, and that’s giving technique to weak spot within the second quarter, for instance.
It’s nonetheless arduous to pinpoint precise impacts tied to tariffs, Ercolao stated, however a broad pattern is rising.
“What we can say over the last six months or so is that economic activity is somewhat flatlining.”
Providers sectors are holding up comparatively properly, however Ercolao stated export-heavy industries reminiscent of manufacturing and transportation are bearing the brunt of the impression.
Financial institution of Canada says client confidence rising
In an try and shore up a few of that weak spot, the federal authorities introduced numerous applications to help tariff-affected employees, and broader plans to speed up defence and infrastructure spending.
Whereas some trade-exposed sectors have confronted job losses and unemployment has usually trended upward to almost seven per cent, employers elsewhere within the economic system proceed to develop their payrolls.
“Consumption is still growing,” Macklem stated. “It’s growing modestly. It’s certainly being restrained by the uncertainty caused by tariffs. But it is growing and we expect that to continue through the third and fourth quarters.”
Final week, the Financial institution of Canada saved its coverage rate of interest unchanged at 2.75 per cent in a 3rd consecutive determination.
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When requested by a reporter for his response to Ontario Premier Doug Ford’s requires a price reduce, Financial institution of Canada governor Tiff Macklem stated the choice to carry the speed at 2.75 per cent was not a political one, and that the financial institution will ensure that a tariff downside ‘does not become an inflation problem.’
If the central financial institution had been panicked in regards to the Canadian economic system’s skill to face up to U.S. tariffs, Ercolao argued it will possible have lowered that price.
The previous week’s GDP readings had been ok for BMO to lift its outlook for the third quarter into constructive territory. Forecasters on the financial institution now count on Canada will keep away from a technical recession this yr.
BMO chief economist Doug Porter stated in a observe to purchasers Friday that Ottawa’s private tax reduce at the beginning of the month and strong demand for home journey amid the commerce warfare will enhance the economic system this quarter, as will “the less-dire sentiment” round financial forecasts.
Another forecasters proceed to pencil a tariff-induced recession into their outlooks.
Within the Financial institution of Canada’s financial coverage report launched alongside the speed determination, it outlined one state of affairs for the economic system assuming the tariff state of affairs stays largely establishment.
Canada avoids a recession in that end result. Progress in 2025 and 2026 stays total constructive, however half a proportion level decrease than it will have been with out the burden of tariffs.
Time to adapt, mitigate adverse impacts
Macklem informed reporters the Financial institution of Canada would count on the economic system to continue to grow even with right this moment’s tariffs, “but it’ll be on a permanently lower path.”
“Unfortunately, the sad reality is that tariffs mean the economy is going to work less efficiently.”
Porter stated in his observe that the precise impression of Trump’s new 35 per cent tariff on Canada’s economic system could possibly be lower than the headline determine suggests.
Due to a carve-out for Canadian exports which might be compliant with the Canada-U.S.-Mexico Settlement (CUSMA), BMO sees the efficient U.S. tariff price at roughly seven per cent underneath the brand new duties, lower than a proportion level increased than it was earlier than Friday.
However with CUSMA up for renegotiation in 2026, Porter stated that 35 per cent tariff price might loom as a “cudgel” over negotiations — taking full impact if the commerce settlement expires with no new deal in place.
The Financial institution of Canada printed a separate “escalation” state of affairs this week that might see the US take away Canada’s CUSMA exemption because it ramps up world tariffs.
Actual GDP would drop an additional 1.25 per cent by 2027 on this extra extreme case; Porter stated that this end result could be “serious for sure, but far from disastrous.”
Ercolao stated a lot of the tariff doom and gloom earlier within the yr was tied to the pace at which these import duties could be imposed.
However the on-again, off-again nature of U.S. commerce restrictions up to now has given companies time to adapt to the brand new approach of doing enterprise and fixed delays in implementation, he stated.
“If we go back to when Trump began his presidency, had he went 100 per cent on his tariff plan right away, we probably would have seen a deep economic contraction just because it would have been so sudden,” Ercolao stated.
“Now we’ve been afforded that time to at least try to mitigate some of the negative impacts from what these tariffs were expected to do to the Canadian economy.”
