BMO Report: US Tariffs Could Slow Growth or Cause Recession in Canada – Moneysenense

A worst-case scenario with a 35% rate across the board could mean a moderate recession in the short term and 5% dented economic growth in the long term, while a middle rate of tariffs averaging 15%, similar to other trading partners such as Europe or Japan, could mean significantly slower growth in the near term and 2.5% growth.

‘Muddld to body’ scenario expected as Canada-US trade talks continue

BMO chief economist Douglas Porter said the most likely path appears to be a continuation of current rates. “We call it the ‘mud through’ scenario,” Porter said. “We do believe that something close to the average rate on Canada is about where we’re going to be left.” He said there could be some changes in industry-specific rates, but that change could go either way.

Prime Minister Mark Carney will meet US President Donald Trump on Tuesday. The pair are expected to discuss trade and security as the ongoing tariff dispute shows few public signs of progress.

“We hope that one of the things we might hear from this week’s meeting between the prime minister and the president is some kind of relief on steel tariffs,” Porter said. “But on the other hand, it could be replaced with something else down the line because we know they have a long list of sectoral rates that the administration is looking at.”

Cusma’s future looms as trade talks signal potential renegotiation

The majority of Canadian goods continue to enter the U.S. tariff-free thanks to an exemption under the Canada-U.S.-Mexico trade agreement; However, the US has continued to expand the use of sector-specific tariffs, including the recent addition of fresh duties on furniture, pharmaceuticals and lumber. Goods not covered by the trade deal are subject to 35% tariffs, hence the report’s worst-case scenario reference point.

The future of Cusma is the big question lurking in the background of trade talks as it is set for review next year. The extent of those negotiations is still unclear, but an important signal of how much change awaits if Trump seeks Congress’s trade promotion authority, which would allow all aspects of the deal to be renegotiated, the report noted.

Canada is using monetary and fiscal tools to cushion the impact of U.S. tariffs

To soften the hit from tariffs, Canada can respond with simpler monetary policy, fiscal stimulus and reoriented trade policy, which the Bank of Canada and the federal government have already begun to do, Porter said. “Both have already responded to some extent, and that’s one of the reasons why the economy has held up a little better than we and others thought earlier this year.”

The Bank of Canada cut its key rate by a quarter percentage point to 2.5% in September, with another cut hitting financial markets before the end of the year. The cut came as lower oil prices have added to inflation fears, while economic indicators suggested the Canadian economy could use the help.

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Real GDP fell 1.6% year on year in the second quarter. Statistics Canada measured July growth at 0.2%, but preliminary data for August suggested no growth.

Although economic growth has been muted, it hasn’t stopped the Canadian stock market from trading around highs, pointing to target rates year-to-date, Porter said. “So far, the effect of the trade war has been very narrow on Canada. It’s the steel and aluminum sectors, the auto sector, copper and now lumber. And other than that, we’re mostly not completely, but mostly free of tariffs as long as you’re USMCA compliant.”

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