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Bank of Canada
In its April Monetary Policy Report, the Bank of Canada included outlooks for the Canadian economy over the next two to three years. Citing the high levels of uncertainty in U.S. policy these days, it did so by describing two outlook scenarios: one in which tariffs are repealed or pulled back, and another in which they are left in place or increased, leading to a general global trade war. The report is clear that the outlooks can’t be considered a forecast, since no one has any idea what Trump will actually do. Here are key takeways from the two scenarios:
Scenario 1
- GDP growth stalls in the second quarter of 2025. It then averages around 1.6 percent through the end of 2027;
- Consumption is subdued in the near term as households build up precautionary savings due to concerns about their future employment prospects and wealth;
- Inflation initially slows due to the removal of the consumer carbon tax, inflation then rises to about two percent and stays at that level;
- Businesses remain uncertain about the strength of demand. As a result, business investment is sluggish, contracting in the second quarter of 2025. Growth in business investment then picks up through 2026 and 2027 as the impact of uncertainty fades.
Scenario 2
- The broad trade war severely impacts Canadian households and businesses, precipitating a year-long recession. GDP contracts for four quarters, with growth averaging about minus 1.2 percent. It then gradually recovers throughout the rest of 2026 and 2027;
- Growth in final domestic demand stalls over the second and third quarters of 2025. It then slowly recovers;
- Canadian exporters reduce production and lay off workers. This, in turn, leads to a rise in unemployment, a drop in real incomes and a slowdown in economy-wide household spending;
- Business investment declines significantly due to weak economic activity;
- A lower Canadian dollar raises the cost of imported equipment and machinery, which further weighs on business investment;
- CPI inflation averages around two percent until early 2026. It then rises above three percent because of upward pressure on prices coming from tariffs. Inflation returns to the two percent target in 2027;
- The Canadian dollar depreciates to 67 cents U.S.