A Canada-US trade war would badly hurt the Canadian economy, but the uncertainty of what comes next has already been damaging enough, says a Canadian economist.
Douglas Porter, Chief Economist at BMO Financial Group, said in a Chamber of Marine Commerce webinar earlier this month the Canadian economic outlook is dimming as businesses across the country are forced to contemplate the possibility of a full-scale trade war with the US that could begin in March.
“Really, we’ve had to chip away at our Canadian growth estimate even absent tariffs because of the uncertainty,” Porter said. “Let’s face it, we’ve been shocked a bit by what was possibly facing us. I think businesses across the country have probably grown more cautious, especially anyone with exposure to the US. We’ve heard lots of stories about businesses, where they can, moving production south of the border, making new investments south of the border.”
With Canadian interest rates trending lower, Porter said the Canadian economy was well positioned to pick up steam and narrow the gap with the US after relatively weak growth the past couple of years. But with the tariff threat looming, all bets are now off.
“That alone has dimmed the outlook for Canada,” he said. “So even though we’ve had this windfall of big interest rate cuts, we really don’t see much improvement in the Canadian economy over the next couple of years because of this dark cloud of uncertainty. And that’s not even including the impact of tariffs.”
Without the tariff threat, Porter said BMO was initially forecasting Canadian economic growth near the long-run average of 1.8% in both 2025 and 2026, up from 1.5% in 2023 and 1.3% in 2024.
In the event the US tariffs do come to pass, and a trade war begins, Porter suggested Canadian economic growth would be reduced to near 0%.
“If we weren’t talking about a trade war, we’d be talking about a Canadian economy that was looking at much brighter days ahead. It’s unfortunate that just as we were getting over the hump of inflation and high interest rates, we’re now facing this uncertainty and this challenge.”
Even in the absence of tariffs, Porter said he was expecting the Bank of Canada to cut interest rates at least two more times, bringing the policy rate down to 2 .5%. In a trade war scenario, the Bank’s rate would likely be chopped down to about 1.5%, not as low as it was during the 2008 financial crisis or Covid, but still a steep drop.
Predicting the path of the Canadian dollar is much trickier, Porter said, but added he believes it could challenge its all-time low of below 62 cents US in 2002 in the event of a trade war. Now trading around 70 cents, he said the loonie likely reflects at least some of the tariff uncertainty and, as far as he is concerned, is still likely slightly undervalued.
