Bank of Canada Governor Tiff Macklem highlighted the potential long-term impacts of a tariff war on Canada’s economy during a recent speech in Toronto.
In his address, Governor Macklem emphasized that while monetary policy can only do so much, the repercussions of increased trade friction with the US are substantial. He mentioned that tariffs could lead to a ‘structural change’ in the economic relationship between the two countries.
If the US were to impose a 10% tariff on energy products and a 25% levy on all other Canadian imports, Canada would likely respond with similar measures. This retaliatory cycle could result in a 3% decrease in Canadian output within two years, effectively stalling any economic growth during that period.
The Bank of Canada anticipates that while the economy might recover following the initial shock, long-term growth could still be 2.5% lower compared to a no-tariff scenario. The anticipated tariffs would make Canadian goods more expensive in the US, reducing demand significantly.
Exports, a crucial part of Canada’s national income, could fall by 8.5% in the first year of the tariff implementation, leading to reduced production and layoffs in the export sector. Macklem underscored that this shock would ripple across the nation, as exports to the US constitute roughly a quarter of Canada’s national income.
Additionally, reduced export revenues would lower household incomes, while retaliatory tariffs might temporarily push consumer prices above the 2% target. Together, these factors could diminish consumer spending and reduce consumption by more than 2% by mid-2027.
Another concern is the depreciation of the Canadian dollar, which would raise the cost of imported goods and services. The interconnected supply chains between the US and Canada would also face increased costs at every production stage. As a result, businesses might cut investment spending, with the bank forecasting a nearly 12% drop by 2026.
Governor Macklem reassured that, with inflation back on target, the bank is poised to contribute to economic stability. However, he cautioned that monetary policy has its limits and cannot fully compensate for the lost economic supply caused by persistent tariffs.
In conclusion, the potential trade war with the US presents significant challenges for Canada’s economy. Governor Macklem’s outlook suggests that while monetary policy may provide some relief, the structural changes brought by tariffs could have lasting effects, underscoring the need for a strategic response to these economic shifts.
