Canada's Economy Faces Growth Squeeze as Tariffs and Oil Prices Bite

Canada's economy is facing a growth squeeze as tariffs and rising oil prices complicate the Bank of Canada's rate outlook, according to Governor Tiff Macklem. The latest U.S. tariffs could lead businesses to delay investment and hiring decisions, cutting fourth-quarter economic growth to below 1% if they remain in place.

This would represent roughly half the growth pace the central bank had been expecting. In July, it forecast third-quarter growth of 1.5%, but recent indicators suggest growth may remain around that pace. However, inflation has moved above the Bank of Canada's 2% target, with annual inflation at 3%. Macklem warned that inflation could rise further if oil prices remain near $100 a barrel.

The Middle East conflict has added to pressure by disrupting fuel production capacity and lifting crude prices, pushing up the cost of gasoline and diesel. While there is no evidence yet that higher fuel costs are feeding into other goods and services, Macklem said the risk of persistent inflation has increased. The Bank of Canada faces a difficult trade-off: cutting rates could allow inflation pressures to persist, while tighter policy could further restrain growth.