Bank of Canada Projects Economic Slowdown with Global Trade War

April 23, 2025

On April 16th, the Bank of Canada unveiled its latest Monetary Policy Report, announcing that it will maintain the overnight rate at 2.75% after a streak of seven consecutive rate cuts. However, the more sobering revelation came from the Bank’s economic outlook, which warns that a prolonged global trade war could trigger “a significant recession.” Let's delve into the analysis of economic indicators, providing valuable insights for CPAs navigating the turbulent waters of ongoing trade uncertainty.

Two possible paths of many for GDP growth and inflation

The April Monetary Policy Report is peppered with the word “uncertainty” 49 times, a noticeable increase from 42 mentions in January's report. The Bank acknowledges the challenge of making credible economic projections amidst heightened uncertainty. As a result, it created two different projections for Canada’s economy until the end of 2027, based on varying trade policy scenarios. One projection includes a recession; the other does not. Both scenarios offer crucial insights for CPAs advising organizations on how to best weather the impending storm.

Scenario 1: A Moderate, Low-Tariff Path

Scenario 1 paints a picture of a more moderate, low-tariff environment where global and Canadian growth weaken temporarily before rebounding. This scenario does not foresee a recession. The size and scope of tariffs in Scenario 1 are akin to past trade disputes, such as the Canada-U.S. softwood lumber dispute and the 2018 tariffs on Canadian steel and aluminum. The tariff assumptions for Scenario 1 are as follows: 

• U.S. tariffs
  • 10% tariffs on all Chinese goods
  • 25% tariffs on imported steel and aluminum
• Retaliatory tariffs
  • China - average of 1% tariffs on U.S. imports
  • Canada - 25% tariffs on $29.8 billion of U.S. goods
• The Canadian dollar is valued at $0.70 USD

Scenario 2: A High-Tariff, No-Holds-Barred Trade War

The Bank cautions that the “unprecedented” size and scope of tariffs in Scenario 2 make it harder to estimate their economic impacts. The direction and depth of impact, however, are telling. Scenario 2 is a no-holds-barred, high-tariff scenario where a severe global trade war decimates growth, plunging Canada into a recession. The Bank of Canada Governor Tiff Macklem emphasized the need to be “flexible and adaptable” given the unpredictable nature of U.S. trade policy. 

Scenario 2 assumes that all tariffs from Scenario 1 are in place plus the following:

• U.S. tariffs
  • 12% tariffs on imports of Canadian/Mexican goods (excluding motor vehicles/parts)
  • 25% tariffs on the non-U.S. content of imported motor vehicles and parts
  • 25% on all goods imported from all other countries, including China
• Retaliatory tariffs
  • Canada - additional 12% tariff on $115 billion of U.S. goods, 25% tariffs on U.S. vehicles
  • Mexico - 12% tariff on all U.S. goods
  • All other countries - 25% tariffs on all U.S. goods
• The Canadian dollar is valued at $0.67 USD

Notably, Scenario 1 assumes lighter tariffs than those currently in place. For instance, as of April 12, 2025, the U.S. had levied a 145% tariff on Chinese products, while China had imposed a 125% tariff on U.S. goods. Scenario 2 is similar to the tariff scenario outlined in the Bank’s January Monetary Policy Report, with adjustments to tariff rates on Canada and Mexico to align with recent U.S. announcements.

Economic Projections: A Tale of Two Scenarios

Scenario 1: Low tariffs stall but do not extinguish growth

Under Scenario 1, Canadian GDP growth edges up from 1.5% in 2024 to 1.6% in 2025, dips to 1.4% in 2026, and then recovers to 1.7% in 2027 (see table below). While these growth rates are modest, Canada avoids a recession. Canadian inflation hovers around 2.0% from 2025 to 2027.

The U.S. economy also slows in this scenario, with GDP growth weakening from 2.8% in 2024 to 2.0% in 2025, and settling at 2.1% in 2026 and 2027. U.S. inflation gradually declines from 2.5% in 2024 to 2.4% in 2025, continuing downward to 2.3% in 2026, before reaching 2.0% in 2027.

Scenario 2: Higher tariffs and a global trade war spur a recession

In Scenario 2, Canadian GDP growth declines sharply from 1.5% in 2024 to 0.8% in 2025, contracting further to -0.2% in 2026 before rebounding to 1.6% in 2027. This recession, spanning Q2 2025 to Q1 2026, reduces Canada’s potential output and standard of living. Tariffs devastate trade, leading to a global slowdown in economic activity, with Canadian exports falling until mid-2026. Exporters reduce production, workers lose their jobs, unemployment rises, real incomes fall, and household spending declines. Consumption falls in 2025, grows modestly in 2026, and strengthens in 2027 as the unemployment rate gradually declines.

Inflation averages 2.0% in 2025, down from 2.4% in 2024. The removal of the consumer carbon tax and excess supply work to reduce inflation, but tariffs and supply chain disruptions push the price of imported goods higher. Inflation reaches 2.7% in 2026 before returning to the 2.0% target in 2027 as the impact of tariffs starts to ease.

Meanwhile, the U.S. economy experiences a sharp slowdown in Scenario 2, with GDP growth falling from 2.8% in 2024 to 1.0% in 2025, further weakening to 0.5% in 2026 before recovering to 2.7% growth in 2027. Tariffs drive U.S. inflation up from 2.5% in 2024 to 2.6% in 2025, peaking at 2.9% in 2026 before easing to 2.0% in 2027.

Conclusion

The Bank of Canada’s April Monetary Policy Report offers a sobering glimpse into the potential future of Canada’s economy. CPAs who grasp what might be ahead will be better equipped to face it and advise their organizations and clients effectively.