Canada’s economy is facing a painful period as trade negotiations with the U.S. ramp up under the threat of new tariffs. Additional tariffs, including some previously announced, are scheduled to go into effect on August 1. Local experts are already warning that these reforms will quash growth and exacerbate inflation in Canada. Quickly approaching that deadline, the two countries remain heavily engaged in negotiations. The prospect of intensifying trade relations with our closest partner continues to loom over Canada’s economic landscape.
Soaring inflation across the country makes this augury all the more ripe. Soaring inflation now stands at 2.4%, exceeding the Federal Reserve’s long-standing inflation target of 2%. One thing we know for sure is that inflationary pressure is on the rise. Simultaneously, unemployment in the U.S. is climbing day by day, heightening fears over the overall economy’s fragility. We expect the unemployment rate to tick up to 7.1%. That’s a big jump up from the 6.2% measured only a year ago.
Tariffs Scheduled to Take Effect
No matter how US-China trade negotiations play out between now and then, the US’s imposition of new tariffs provides Canada with a critical opportunity. Over the last few months, President Trump has threatened to slap an eye-popping 35% tariff on goods from our neighbor to the north. This unprecedented attack would be catastrophic for Canada’s economy. Analysts fear that these tariffs will be severely damaging to our international trade relationships. They’ll significantly increase costs for American consumers and businesses.
The tariffs will have negative consequences on economic growth in Canada, leading to decreased investment and consumer spending. With inflationary pressures already straining the U.S. economy, adding tariffs would raise prices even more and make an already inconvenient economic situation even worse. Business leaders and economists speak in desperate terms. They worry that Canada’s economy may not be able to absorb these shocks, leading to a general slowing of growth.
Given these realities, Canadian policymakers are now under incredible pressure to deliver — and fast. The government must balance the need for robust trade relations with the United States while addressing the potential fallout from tariff implementation. With negotiations underway, what the final product will look like is anyone’s guess, but the stakes are certainly high.
U.S. Economic Indicators Raise Concerns
The economic tea leaves from the United States are making waves on the other side of the border. National job growth in the U.S. has hit a brick wall since January. Perhaps the strongest sign of the economy’s battle against uncertainty was that in May, the economy only created 8,800 jobs. The increasing unemployment rate, now expected to reach 7.1%, highlights concerns that the U.S. economy may be entering a more challenging phase.
The Federal Open Market Committee (FOMC) is monitoring current events very carefully. Some of the current members are pressing for a rate decrease by as early as July. Headline inflation is expected to increase to 2.5% in June. As such, most experts agree that monetary policy needs to change in response to this rapidly changing economic environment. The Fed is still widely expected to deliver at least one rate cut before year’s end. More than this decision, it should serve as a reminder of the careful balance that policymakers need to strike.
As Canada faces rising inflation and other economic pressures, it can’t afford to miss the boat on what’s happening on their neighbor’s side of the fence. A U.S. economic slowdown would quickly leak over into Canada, changing the trade balance and to some extent the stability of our economy.
The Path Forward for Canada
Given these headwinds, Canadian policymakers should brace for an especially stormy macroeconomic climate. If tariffs do indeed raise inflationary pressures while curtailing growth prospects, further strategic policy responses may be warranted. Cooperation with our U.S. counterparts will continue to be incredibly important, as both countries look for areas of agreement and ways to de-escalate tensions.
Moreover, with inflationary pressures increasing in both countries, Canadian consumers will be waiting a while for this relief to materialize. Tackling these challenges will take sustained attention from policymakers and early action to protect the most exposed parts of the Canadian economy.