Tariff Threats Derail Canada's Q2 Growth Rebound

Canada's economy is expected to rebound in Q2, driven by domestic demand and exports. According to Brown Brothers Harriman's (BBH) Elias Haddad, real GDP will rise 3.4% SAAR, outpacing the Bank of Canada's (BoC) projection of 2.5%. However, this growth is threatened by the deepening US-Canada trade war and new tariffs on about 0.85% of Canada's GDP.

The US has imposed 50% tariffs on nearly $20 billion in imports from Canada, including wine, hockey sticks, and cement. The tariff does not apply to energy, potash, or other goods like fish or critical minerals. Canada will match the new US tariffs dollar for dollar from September 8.

The Bank of Canada can afford to keep rates on hold due to core inflation being close to the 2% target. As a result, the swaps curve, which implies 75bps of tightening in the next twelve months, may adjust lower against CAD in the near term.