Some economists are exhibiting a more optimistic outlook regarding Canada’s ongoing tariff dispute with the United States, suggesting that the economy may avoid the most dire implications of the trade war. However, this does not imply that the Canadian economy is entirely unscathed; recent forecasts released by Deloitte Canada imply that a modest recession is likely to occur in the second and third quarters of the year due to uncertainty and challenges stemming from imposed tariffs.
Dawn Desjardins, the chief economist at Deloitte Canada, noted that the economy is poised for a considerable slowdown following a surprisingly robust first quarter, during which many businesses expedited their orders to escape looming tariffs. Nevertheless, exports from Canada showed signs of a significant downturn in April, indicating mounting pressure on the economy. Furthermore, Deloitte anticipates that weaknesses in the manufacturing sector will extend over the coming months, projecting a rise in unemployment to 7.3 percent by fall, up from 7 percent in May.
Desjardins pointed out that the downturn could have been significantly steeper had Canada not secured tariff exemptions for CUSMA-compliant exports in early negotiations with the United States. The recent decision by U.S. President Donald Trump to double steel and aluminum tariffs to 50 percent, however, is expected to have severe repercussions for those industries in Canada, particularly if further reciprocal tariffs are imposed at the conclusion of a 30-day negotiation deadline in July.
According to Deloitte’s assessments, regions such as Eastern and Central Canada, alongside British Columbia, are likely to experience subdued growth due to the tariff dispute. However, Canada’s prairie provinces along with Newfoundland and Labrador are expected to see an increase in output, largely fueled by energy exports. Desjardins expressed that the current status quo, if maintained, would not signify the “worst-case outcome” that some analysts had feared several months ago amidst heightened tariff talks.
Even with two anticipated negative quarters, Deloitte expects Canada to record real GDP growth of 1.1 percent for the year, with an acceleration to 1.6 percent by 2026. While these figures are not particularly striking, they represent a more favorable scenario compared to a prolonged economic downturn, and unemployment is predicted to drop back below 7 percent early next year.
RBC is also contributing to a more optimistic forecast, emphasizing upside risks amidst a generally gloomy outlook on the trade war, according to a report published on June 13. The report notes that while Canada’s economic path is fraught with challenges, it appears considerably less daunting than it did a few months prior. Despite suffering from a decline in consumer and business confidence due to ongoing trade negotiations with the United States, the hard data indicate that household spending remains resilient.
Desjardins believes that a positive shift in clarity regarding trade relations will inspire businesses to resume their investments. Her projections suggest that economic recovery could initiate in the latter half of the year, aided in part by the forecast of two additional quarter-point rate cuts from the Bank of Canada. Conversely, RBC contends that the economy is showing sufficient vigor to forgo any immediate need for further rate cuts. However, RBC’s assistant chief economist Nathan Janzen acknowledged that the central bank would have the capacity to implement more monetary policy support if necessary as cracks begin to surface within the economy.
Both RBC and Deloitte recognize recent legislative actions by the federal government as measures to shield Canada’s economy from a more severe downturn. The House of Commons recently passed Bill C-5, a comprehensive piece of legislation aimed at reducing interprovincial trade barriers and expediting major project developments. Desjardins indicated that this legislation addresses persistent concerns regarding the sluggish pace of Canadian industry, which often gets caught in bureaucratic red tape before initiating projects.
This renewed focus on interprovincial trade barriers comes at a time when economists have long highlighted the need for improved business investment levels and productivity across Canada's sectors. Desjardins argues that the impetus from the trade war has propelled these issues to the forefront of economic discussions. Moving towards a “One Canadian Economy” framework, as the government has called it, signifies a preparatory phase for fostering a more resilient economy, though such transformations will take time to materialize.
RBC concurs that efforts to address interprovincial trade barriers could yield long-term benefits that support investment and productivity growth. Nevertheless, the uncertainty surrounding the U.S. market amid global trade disruptions provides an opportunity for resource-rich Canada to meet the growing worldwide demand for critical minerals essential for new technology and defense products. Desjardins warns that it could take several years for the measures enacted today to yield significant returns, as reorienting supply chains and stabilizing affected manufacturing industries still requires time. However, the current governmental signals are essential in bolstering business confidence and encouraging investments for the future.
