Canada's Economy Takes Hit as Trade War Escalates

The escalating trade war between Canada and the United States has taken a significant toll on Canada's economy, according to Chief Economist Douglas Porter of BMO. The US tariffs imposed on Canadian goods could subtract around 0.5 percentage points from Canadian GDP growth, while Canada's retaliatory measures could add between 0.2 and 0.3 percentage points to inflation.

The impact on the United States remains modest due to its relatively low dependence on bilateral trade with Canada. BMO has even raised its US growth forecast to 2.2 percent, driven by strong investment in AI infrastructure.

Markets are still pricing several Bank of Canada hikes in 2027, assuming a truce will eventually be reached. However, Porter warns that implementing 50% auto and parts tariffs would eliminate these expected hikes entirely.