Tariffs zap Canada’s budding recovery
Canada’s economy was beginning to recover from a prolonged slump but new U.S. tariffs added another threat to the outlook, says BMO senior economist Sal Guatieri.
“The latest trade skirmish arrived just as Canada's economy was looking to break free from a year-long slump,” Guatieri wrote in an economic outlook.
Real GDP expanded at an annualized 3.3% in the second quarter, but that momentum stalled in July when gains in construction and utilities were offset by declines in manufacturing, mining and trade, Statistics Canada reported this week.
“The budding momentum in the economy now risks getting zapped by new tariffs and trade policy uncertainty,” Guatieri wrote.
The U.S. imposed 50% duties on roughly 5% of Canadian goods exports on Aug. 22; Canada responded on Sept. 8 with tariffs of up to 50% on nearly 7% of U.S. exports. BMO estimates that if the U.S. tariffs hold for a year, they could cut Canada’s annual real GDP growth by about 0.5 percentage points, raise unemployment by two-tenths of a point, and add 0.2 to 0.3 points to inflation through Canadian counter-tariffs. BMO expects growth to slow to 1.3% annualized in the third quarter and around 1% for 2026.
Beneath the flat July headline, construction rose 1.3% for a fourth straight month and utilities rose 1.7% on a heat wave, while manufacturing dropped 0.9%, mining fell 0.5% and retail and wholesale trade both decreased.
“Just because the headline number looks flat — there was notable movement happening underneath,” Jasleen Kaur Trehan, an economist with the Business Data Lab at the Canadian Chamber of Commerce, told Means & Ways in a statement. “July was a strong month for construction, providing a lift as manufacturing, mining and oil and gas pulled back.”
There were also gains in several service industries, including accommodation and food services, professional and technical services, and real estate and rental services. Those increases were not enough to overcome declines in retail and wholesale trade.
StatsCan’s preliminary estimate suggests GDP rose 0.2% in August, with official figures due Oct. 30. The Chamber expects third-quarter growth around 2% annualized.
“The encouraging signal is that July may prove to have been a pause, rather than the start of a more sustained slowdown,” Trehan said.
That leaves the Bank of Canada weighing slower growth against inflation and trade-related costs. “Growth has cooled, but with inflation and trade-related cost pressures still a concern, the Bank is facing an increasingly difficult balancing act,” Trehan said.
