Tariffs could weaken the country’s economy in the next two years, says Bank of Canada (BoC) governor Tiff Macklem.
While speaking to members of the Mississauga Board of Trade and the Oakville Chamber of Commerce on Friday, Feb. 21, Macklem highlighted the uncertainties brought about by tariff threats and compared its potential impact to the pandemic.
“In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened. This time, if tariffs are long-lasting and broad-based, there won’t be a bounce-back,” he stated.
“We may eventually regain our current rate of growth, but the level of output would be permanently lower. It’s more than a shock — it’s a structural change.”
He stated that even the period of uncertainty is “already causing harm” and that a trade conflict would cost people their jobs and reduce exports and investments.
The immediate impact of tariffs on Canada
Macklem pointed out that the threat of tariffs has brought about uncertainty just as Canada’s economy is “on a better footing.” Currently, the country’s inflation rate is hovering at around two per cent, interest rates have dropped, and household spending has increased.
However, if the U.S. follows through with its threat of tariffs, the effect would be “severe,” and the export sector would be the first to feel the immediate impact in Canada.
“As Canadian goods become more expensive, U.S. demand for those goods would decline,” he said. “A lower Canadian dollar would provide a partial offset.”
BoC predicts that exports could fall by 8.5 per cent the year that tariffs take effect, leading exporters to cut production and lay off workers in Canada. And since U.S. exports account for a quarter of Canada’s national income, the “shock” would be felt nationwide.
The far-reaching economic impact
“Lower export revenues would reduce household income,” said Macklem. “And retaliatory tariffs would raise the prices of many consumer goods. As a result, consumer spending on everything from cars to entertainment and housing would slow. In this scenario, consumption declines by more than two per cent by mid-2027.”
BoC also predicts higher costs and lower profit margins would cause a nearly 12 per cent investment drop. The combination of a weakened loonie and retaliatory tariffs would make it expensive for businesses to buy equipment from the U.S., and these added costs would be passed on to Canadians.
“In our January projection with no tariffs, we forecast growth of about 1.8 per cent in both 2025 and 2026,” said Macklem. “But in the tariff scenario, the level of Canadian output falls almost three per cent over two years. That implies tariffs would all but wipe out growth in the economy for those two years.”
And even as demand drops, tariffs would mean higher prices. It could also push Canada’s inflation rate above two per cent.
Macklem said that the government would have to consider “structural reforms” to increase productivity and investments to mitigate the effect of tariffs.
“Removing rules that restrict interprovincial trade and harmonizing or mutually recognizing provincial regulations could provide some offset to increased trade friction with the United States,” he said. “As Canada confronts the reality of increased trade friction with the United States, a concerted focus on productivity has rarely been more important.”
He reiterated that structural changes are inevitable.
“Increased trade friction with the United States is a new reality,” he said.
