Tariff War Could Sink Canada’s Economy Into Recession, Experts Warn
Canada’s Economy on the Brink: Tariff War Threatens Growth, Jobs, and Inflation
Editorial Team (ET)May 8, 2025
Canada is on the brink of a severe economic downturn as the country braces for the fallout of a full-scale tariff war with the United States. Economists warn that sustained trade hostilities could push the nation into its worst recession since the COVID-19 pandemic.
With former U.S. President Donald Trump reintroducing a 25% tariff on Canadian exports and Prime Minister Justin Trudeau retaliating with countermeasures on C$155 billion ($105 billion) worth of American goods, the situation has escalated into a high-stakes economic standoff.
A Recession in the Making
The implications of the tariff war are dire. Leading economists estimate that the Canadian economy could shrink by as much as 4%—a devastating contraction for a country that was projected to grow at a modest 1.8% in 2025. Inflation is also expected to surge beyond the Bank of Canada’s 2% target, while the unemployment rate could exceed 7%.
Chief economists from major financial institutions, including the Bank of Montreal (BMO) and Toronto-Dominion Bank (TD), predict a sharp decline in the Canadian dollar, potentially sinking to 65 U.S. cents. If the trade war drags on for more than six months, Canada could face a deep and prolonged recession.
Impact on Key Sectors
The tariffs are set to hammer industries that rely on cross-border trade. The manufacturing sector, particularly automotive and machinery exports, will take the biggest hit. Farmers and food suppliers are bracing for price hikes, as imported U.S. agricultural products become more expensive. The retail sector is also likely to suffer as supply chain disruptions and higher costs ripple through the economy.
Paul Ashworth, Chief North America Economist at Capital Economics, described the tariffs as an “existential threat” to Canada, given that goods exports to the U.S. account for nearly 20% of the country’s GDP.
Bank of Canada’s Next Move
In response to the growing economic pressure, the Bank of Canada is expected to slash interest rates aggressively. Economists predict that the central bank may cut rates by at least 50 basis points in an attempt to counteract the downturn. However, lower rates alone may not be enough to stabilize the economy if trade restrictions remain in place.
Consumers to Bear the Burden
The cost of tariffs won’t just be felt by businesses. Canadian consumers will also see price increases across a wide range of goods, from groceries to electronics. The Independent Institute’s Phillip Magness warns that tariffs act as hidden taxes, ultimately passed down to consumers.
Food prices, particularly fresh produce, are expected to rise sharply in the coming weeks, while prices for appliances and automobiles will likely increase over a longer period. At the same time, a weaker Canadian dollar will make imported goods even more expensive.
A Path to Resolution?
Despite the grim outlook, some economists believe a resolution could still be negotiated. CIBC’s Chief Economist Avery Shenfeld remains cautiously optimistic, suggesting that past trade disputes with the U.S. have often been resolved through diplomatic negotiations. However, until an agreement is reached, Canada remains in a precarious position.
Conclusion
The escalating tariff war between Canada and the U.S. is shaping up to be one of the biggest economic challenges of the decade. With GDP contraction looming, inflation rising, and job losses mounting, policymakers must act swiftly to mitigate the damage. Whether through monetary policy adjustments, fiscal stimulus, or trade negotiations, Canada’s response in the coming months will determine how severe the fallout will be.
