US Tariffs Threaten Canada's Economic Rebound

Canada's economy is expected to rebound in Q2, according to Brown Brothers Harriman's (BBH) Elias Haddad. He forecasts a 3.4% year-over-year real GDP growth rate, surpassing the Bank of Canada's (BoC) projection of 2.5%. Domestic demand and exports are driving this recovery.

However, the US-Canada trade war poses a significant risk to this growth rebound. The collapse of trade talks between the two countries has led to fresh tariffs, with 50% duties now applied to approximately $20 billion in imports from Canada, which accounts for about 0.85% of Canada's GDP.

The tariff affects a range of products, including wine, hockey sticks, and cement. But it does not apply to energy, potash, or critical minerals. In response, Canada will match the new US tariffs dollar for dollar from September 8.

Fortunately, core inflation remains close to the BoC's 2% target, allowing it to keep interest rates on hold. This implies that there is room for the swaps curve to adjust lower against the Canadian dollar in the near term.