Canada doesn’t need to be hit by tariffs for the economy to be impacted — the mere threat of a trade war is enough, the Bank of Canada has warned.
The Bank of Canada on Wednesday released the summary of its governing council deliberations, outlining the discussions its members had in the run-up to the last rate cut announced on Jan. 29.
“Even if no tariffs were imposed, a long period of uncertainty under the cloud of tariff threats would almost certainly damage business investment in Canada,” the report said.
It added that a hit to investments would damage growth prospects for Canada’s economy.
“Companies were already re-evaluating their investment plans in the face of trade policy uncertainty. With significant tariffs, the risk of capital flight would increase, exacerbating Canada’s competitiveness challenges and low productivity growth.”
Governing council members also reviewed reports that indicated that the Canadian dollar had already taken a hit from the uncertainty. Tariffs, they said, would cause the loonie to slide further.
Bank of Canada economists were concerned that long-term, tariffs would be devastating for Canada’s export sector.
“Over time, this could lead to business closures and companies exiting the export sector.”
The report said a trade war between the U.S. and Canada would damage the economies of both countries, but Canada would take the bigger hit.
“It was clear that a protracted trade conflict would lead to a decline in economic activity. GDP would be lower in both Canada and the United States, but the GDP loss would be significantly larger for Canada because Canada has a more open economy, and its exports are so concentrated with the United States,” it said.
The report added that Canada’s exports were so concentrated on the U.S. that the damage to the Canadian GDP from tariffs would be “permanent” until the Canadian economy readjusted to tariffs.
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The bank also warned that retaliatory tariffs by Canada and other nations against the U.S. could also cause a period of inflation.
“While retaliatory tariffs would likely represent a one-time increase in the level of prices, members noted that, given the size of the shock, there was a risk that higher import prices could feed into other prices,” the report said.
“If this leads to an increase in inflation expectations, it could generate higher ongoing inflation.”
The Bank of Canada report raised fears that a “global trade conflict” would lower global growth.
While in theory, this would mean lower oil prices, and therefore lower inflation, the central bank warned that it would also reduce incomes in Canada, given the country’s large energy export sector.
A tariff war would also cause “considerable” manufacturing bottlenecks, given the interconnected nature of the Canada-U.S. supply chain.
Royal Bank of Canada economist Claire Fan in a report published Wednesday projected that Canada’s growth rate would come to a halt if tariffs were protracted.
“If tariffs were implemented in Q2 this year, we think real GDP growth in Canada would be reduced to zero in 2025 and then, contract by about 2% in 2026,” she said in a report.
If the tariffs are prolonged, Canada’s unemployment rate could peak around eight per cent in 2027. If the tariffs are applied for a limited time, this number would be around six per cent.
In the event of short-term tariffs, Fan said the “unemployment rate would rise marginally to peak at just more than 7% over the second half of 2025 before dropping lower.”
If tariffs are imposed for a short amount of time, RBC said it would cut its current projection of 1.3 per cent GDP growth into half. However, in that case,growth would be strongerin 2026 and 2027 as trade and production activities resume.
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