HALIFAX — Canada’s economic recovery could face a new setback as uncertainty over U.S. trade policy makes businesses more cautious about investment and hiring, Bank of Canada governor Tiff Macklem warned Monday.
In prepared remarks delivered to the Halifax Partnership, Macklem said businesses had spent the past year adjusting to higher tariffs, allowing economic growth to resume. But that progress came before the latest escalation in the trade dispute with the United States.
Following the breakdown of trade talks, the U.S. president imposed 50 per cent tariffs on a range of Canadian goods, moved to prohibit some Canadian imports outright and signed an executive order seeking to rename Lake Ontario as Lake America.
“The unpredictability of U.S. trade policy has increased uncertainty for everyone,” Macklem said.
He warned that the latest escalation could prompt businesses to once again postpone investment and hiring decisions, effectively sending some companies back to an earlier stage of reassessing their plans.
Canada’s economy expanded at an annualized rate of 3.3 per cent in the second quarter, marking its strongest quarterly growth since early 2023.
However, the latest U.S. tariffs cover nearly $28 billion worth of Canadian goods. Macklem said that if those measures remain in place, the pace of economic growth could be cut roughly in half in the fourth quarter, falling to less than one per cent.
Macklem acknowledged the challenges ahead but said the Canadian economy continues to demonstrate resilience.
“This isn’t going away any time soon, but people are getting on with it. People are figuring out how to move forward,” he said during a news conference following his speech.
Oil prices add another layer of pressure
The trade tensions are unfolding alongside another concern for the Bank of Canada: the continuing conflict in the Middle East, which Macklem said is contributing to higher oil and gasoline prices.
“When we released our monetary policy report in July, the conflict was expected to ease and supply disruptions to gradually normalize. Instead, key shipping routes remain disrupted and refineries have been damaged,” he said.
Under current conditions, Macklem said that if oil prices remain around US$100 per barrel, the central bank expects inflation to edge higher over the coming months.
Statistics Canada reported that annual inflation stood at three per cent in August, unchanged from July and at the upper end of the Bank of Canada’s target range.
The central bank left its key interest rate unchanged at 2.25 per cent earlier this month. Financial markets, however, have shifted in recent weeks and are now anticipating that the Bank could move toward higher interest rates sooner rather than later.
Macklem said the Bank has so far looked through the direct effect of higher oil prices on inflation, working on the assumption that the impact would be temporary. But he acknowledged that the risk of more persistent inflation has increased.
“The real issue is the longer inflation stays high, the longer those gasoline and diesel prices are high, the less ability businesses have to absorb that and the increased likelihood that that gets passed on,” he said.
“So that’s something we’re watching very closely.”
