BMO warns even steady tariffs could dent GDP; sector-specific risks rise as US expands levies
A single policy shift at the border could tip Canada from slow growth into recession—this is the stark warning from BMO’s latest report, which models the impact of escalating US tariffs on the Canadian economy.
Even if tariffs remain at their current average of about seven percent, BMO projects a 1.5 percent drop in long-term GDP compared to earlier forecasts, while a worst-case scenario of 35 percent tariffs could trigger a moderate recession and shave five percent off long-term growth.
The most likely outcome, according to BMO chief economist Douglas Porter, is a continuation of current rates, which he calls the “muddle through” scenario. He cautions, however, that industry-specific tariffs could still shift unpredictably, BNN Bloomberg reported.
The targeted nature of these tariffs is already evident.
Sectors such as steel, aluminum, autos, copper, and lumber have borne the brunt, while most other goods remain exempt under the Canada-US-Mexico Agreement (CUSMA).
However, as reported by BNN Bloomberg, the US continues to expand sector-specific tariffs, recently adding new levies on furniture, pharmaceuticals, and lumber.
Goods outside the trade deal face the full 35 percent tariff, underscoring the risks if negotiations falter.
The uncertainty is not just theoretical.
BNN Bloomberg reported that Roustan Hockey, Canada’s last major wooden hockey stick factory, is facing shipment delays and surprise border tariffs, with some goods flagged for rates as high as 200 percent.
The company’s experience highlights the broader disruption in Canadian manufacturing, which has lost nearly 38,000 jobs in the past year and seen investment in industrial equipment fall to record lows, as noted by the National Bank of Canada.
Despite these headwinds, the Bank of Canada and federal government have responded with easier monetary policy and fiscal stimulus.
The Bank of Canada recently lowered its key rate to 2.5 percent, with another cut expected, aiming to cushion the blow from weaker exports and a 1.6 percent annualized GDP decline in the second quarter.
Porter notes that these measures have helped the economy perform better than anticipated earlier in the year, even as real GDP growth remains muted.
Globally, the Organization for Economic Co-operation and Development (OECD) reports that, while tariffs are creating challenges, most economies—including Canada—are still expected to grow, barring further escalation.
The OECD forecasts Canada’s GDP to rise one percent this year and 1.1 percent in 2026, but warns that the full impact of tariffs is still unfolding and urges countries to co-operate to ease trade tensions.
