Re-escalating trade war puts Canada’s economic rebound at risk: economists

Tombe said the direct impacts of the tariffs will be felt most acutely in British Columbia, followed by Ontario and Quebec. Economic pain won’t hit all at once and will instead play out over the coming months, he said.

While some industries are expected to struggle under the weight of the new levies, Canada’s economy can absorb the hit from a macro perspective, most economists weighing in since the duties were first threatened last month have argued.

Randall Bartlett, deputy chief economist at Desjardins, said in an interview that he expects the domestic economy will avoid a recession as it grapples with new tariffs.

Before negotiations imploded on Friday, the economy had been showing signs of a rebound after a pair of quarterly contractions.

Bartlett said he expects gross domestic product grew around three per cent on an annualized basis in the second quarter. Desjardins expects the tariffs and associated uncertainty will cut GDP growth in the second half of the year down to about one per cent, compared with a previous forecast of two per cent.

The reignited trade war is expected to shave a few tenths of a percentage point off growth in 2027, too, Bartlett said.

Bradley Saunders, North America economist at Capital Economics, said in a note to clients Monday that the new tariffs push Canada closer to a recession, particularly if the United States ramps up attacks in response to Ottawa’s own retaliation.

In a social media post Monday, U.S. President Donald Trump threatened further escalation by raising existing tariffs on autos to 50 per cent and extending equivalent duties to auto parts starting Jan. 1, 2027.

Saunders noted that there will likely be knock-on effects to the renegotiation of the Canada-U.S.-Mexico agreement, known as CUSMA. Businesses are now more likely to restrain investment decisions amid further uncertainty around the future of free trade in North America, he argued.

Tombe agreed that uncertainty could cause a “much larger economic hit” than the tariffs themselves.

“The pace of economic growth has slowed largely for Canada because of uncertainty rather than tariffs. And right now that uncertainty has just ratcheted right back up again,” he said.

Saunders said he estimates Canada’s effective tariff rate — the average duty facing a Canadian good crossing the border — has now nearly doubled to 5.6 per cent from 2.9 per cent previously. Other economic firms had varying estimates of the new effective tariff rate on Monday, but most put it in the mid-to-high single digits.

“Either way, the upshot is that Canada’s relative tariff advantage over other economies has taken a dent,” Saunders said.

Prime Minister Mark Carney has pledged to retaliate with Canada’s own tariffs starting Sept. 8, but it’s not yet clear what those duties will target or what other trade restrictions Canada might apply.

Canada initially imposed 25 per cent retaliatory tariffs a range of U.S. goods for six months in 2025 but dropped the bulk of them last September.

A Bank of Canada analysis found that retail prices on affected items rose roughly six per cent compared with non-tariffed goods during that period. Prices returned back to pre-tariff levels roughly three months after the counter-tariffs were dropped, according to central bank analysts.

Before the latest round of tariffs, the Bank of Canada was widely expected to hold its benchmark interest rate steady at its decision next week.

Bartlett said he doesn’t think the new duties will immediately shift the central bank’s stand-pat stance. A lack of clarity on Canada’s response and the potential for the two sides to return to the negotiating table in the weeks ahead should have monetary policymakers in wait-and-see mode, he argued.

Canadian counter-tariffs could also drive a “stagflationary shock,” Bartlett said, if domestic companies raise prices at the same time as their sales take a hit. That, combined with ongoing price pressures from the war in Iran, will likely leave the Bank of Canada on the sidelines for the rest of the year, he said.

Economists also say the extent of economic harm will depend on the degree of fiscal stimulus from Canadian governments.

Finance Minister François-Philippe Champagne told reporters in Montreal on Monday that the federal government plans to support affected workers and businesses for as long as necessary. He was set to meet with his provincial counterparts later in the day to discuss a collective response to tariffs.

The federal government has projected deeper deficits since Carney came to office as Ottawa tries to help tariff-stricken industries pivot away from reliance on the United States.

Bartlett said it’s difficult to know exactly what the federal fiscal situation looks like given the raft of spending announcements since the government’s spring economic update in April.

But he said the federal government likely does have fiscal room to support Canadian businesses affected either by the new U.S. tariffs or by Canada’s retaliatory actions. The coffers of the federal government and some provinces have been buoyed by higher energy prices amid the war in the Middle East, he noted.

“Some of the provinces are a lot more constrained in what they can possibly do, and certainly will be looking to the federal government, I think, to provide that cushion in a way that especially some of smaller provinces might be challenged to do,” Bartlett said.

This report by The Canadian Press was first published Aug. 24, 2026.

Craig Lord, The Canadian Press

by The Canadian Press

Re-escalating trade war puts Canada’s economic rebound at risk: economists

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