MISSISSAUGA, Ont. — U.S. tariffs and Canada's retaliation to them would have a devastating effect on the economy, pulling growth down while reigniting inflation, said Bank of Canada governor Tiff Macklem.
"A new crisis is on the horizon. If U.S. tariffs play out as threatened, the economic impact would be severe."
But unlike the inflation that followed the COVID-19 pandemic, in this scenario the Bank of Canada doesn't have a lot of tools in its toolbox to mitigate the devastating effects tariffs would have on the economy, Macklem said in a speech Friday at an event put on by the Mississauga Board of Trade and the Oakville Chamber of Commerce.
A better economy compared with a few years ago will help, Macklem said, but he warned that the shock from tariffs would be very different from the economic shock of the COVID-19 pandemic, he said.
"In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened," he said.
"This time, if tariffs are long-lasting and broad-based, there won’t be a bounce-back. We may eventually regain our current rate of growth, but the level of output will be permanently lower. It’s more than a shock, it’s a structural change."
U.S. President Donald Trump has threatened sweeping tariffs on Canadian goods to begin in March. Canada has retaliated with tariffs of its own on American imports.
If the U.S. imposes its threatened tariffs and Canada retaliates, Canadian economic growth would take a hit while inflation could also rise, Macklem said.
Lower export sales as a result of tariffs would reduce household income, while retaliatory tariffs would be inflationary on U.S. goods coming into Canada, he said.
"While the new tariffs have not yet taken effect, the uncertainty around U.S. trade policy is already affecting our economy, and if the U.S. starts a protracted trade war, the consequences could be severe."
The Bank of Canada can help the economy adjust to a trade shock by lowering interest rates to help support consumer demand, said Macklem.
However, he added that the central bank can't lower rates too much without risking adding fuel to the inflation fire.
“We’re not thinking of a COVID-type response here," he said during a press conference after the speech.
The Bank of Canada has cut interest rates in quick succession over the past several months as inflation has moderated from its highs while the economy has stagnated.
The loonie has weakened in recent months as rates declined, and Macklem said that trend could continue amid a trade war.
Exports to the U.S. account for about a third of Canada's national income, said Macklem.
Macklem said open trade between Canada and the U.S., which has increased over the years, has benefited both countries.
"A significant increase in tariffs will kick all this into reverse," he said.
The Bank of Canada hiked rates from near-zero to fight the inflation that gripped the economy post-pandemic, before beginning to cut rates last year.
The Bank of Canada may be limited in its ability to respond to tariffs, but Macklem highlighted a few ways governments can make positive structural changes to help Canada weather the storm.
Both are issues that business groups have been calling for change on since before tariffs came into play.
One is the issue of productivity. Macklem admitted it's a "bit of an amorphous concept," but said it leads to higher wages for workers, and makes businesses more competitive at home and globally.
"For monetary policy, it means the economy can grow more without inflationary pressure," he added in a question-and-answer session after the speech.
The Bank of Canada has already been sounding the alarm on Canada's weak productivity, said Macklem, "and if there was ever a time to break the glass, it's now."
Macklem also highlighted interprovincial trade barriers, and said he hopes that this time Canada could see some real movement on a longstanding gripe from business.
Such barriers are among what the governor called "own goals" that if resolved, would better protect the domestic economy from external challenges.
"We have many little regulatory differences between provinces that impede the flow of goods and services across the country because it adds costs," he said.
"We could harmonize those, or ... we can just mutually recognize those regulatory differences across the country."
This report by The Canadian Press was first published Feb. 21, 2025.
Tara Deschamps and Rosa Saba, The Canadian Press
