If Canada is hit by sweeping, broad-based tariffs from U.S. President Donald Trump, the hit to the Canadian economy could be permanent, Bank of Canada governor Tiff Macklem is warning.
Speaking to the members of the Mississauga Board of Trade and the Oakville Chamber of Commerce on Friday, Macklem said the shock from the tariffs would be very different from the economic downturn caused by the COVID-19 pandemic.
“In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened,” Macklem said. “This time, if tariffs are long-lasting and broad-based, there won’t be a bounceback.”
Macklem said while Canada could recover part of the growth, the damage would be long-lasting.
“We may eventually regain our current rate of growth, but the level of output would be permanently lower. It’s more than a shock — it’s a structural change,” he said.
Macklem said the first sector to feel the pinch would be Canada’s export sector.
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“As Canadian goods become more expensive, U.S. demand for those goods would decline. A lower Canadian dollar would provide a partial offset,” he said.
He said the Bank of Canada estimates an 8.5 per cent decline in the first year following broad-based tariffs, with Canadian exporters expected to respond by cutting production and laying off workers.
He said, “With exports to the United States accounting for roughly one-quarter of our national income, the shock would be felt across Canada.”
This would lead to lower household income, he said.
And Canada’s retaliatory tariffs would mean higher inflation.
“As a result, consumer spending on everything from cars to entertainment and housing would slow,” he said, projecting a 2.5 per cent decline in consumer spending by mid-2027.
Macklem said broad-based tariffs would “wipe out growth in the economy” for 2025 and 2026, forcing Canadian businesses to cut investment spending.
He said Canada could offset some of the impacts of the tariffs by making structural changes.
“Removing rules that restrict interprovincial trade and harmonizing or mutually recognizing provincial regulations could provide some offset to increased trade friction with the United States,” he said.
“Provinces could also make it easier for workers to move within Canada by mutually recognizing different labour accreditations.”
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