Navigating a Modest Recession Amid Tariff Tensions
A recent forecast by Deloitte Canada has shed light on the economic challenges facing the country as it grapples with a tariff dispute with the United States. The report, released on June 25, predicts a modest recession in the second and third quarters of this year, driven by uncertainty and weakness caused by tariffs. Despite a surprisingly strong first quarter, where many businesses rushed orders to preempt looming tariffs, Canadian exports showed a steep decline in April, signaling tougher times ahead.
Dawn Desjardins, chief economist at Deloitte Canada, emphasized the slowdown, stating, 'We do think the economy really is going to be considerably slower.' The forecast highlights that while the economy will grow by 1.1 percent by the end of 2025, accelerating to 1.6 percent by 2026, the immediate future remains challenging. Regions like Ontario and Quebec are expected to be hit hardest due to their significant trade ties with the U.S.
Trade Clarity Offers a Path to Recovery
Despite the gloomy short-term outlook, Deloitte's report offers a glimmer of hope through the potential for trade clarity. Economists are increasingly optimistic that Canada can avoid 'worst-case' scenarios in the ongoing trade war with the U.S. The resolution of trade disputes could pave the way for a rebound, with GDP growth projected to return by the end of 2025.
The forecast also identifies several positive factors amid the uncertainty. A 'Buy Canadian' movement and an increase in domestic travel are expected to cushion some of the economic blows from tariffs. Desjardins noted that these trends could help support local businesses and mitigate job losses during the recessionary period.
However, significant downside risks remain. Deloitte warns that if the current carve-out under the Canada-United States-Mexico Agreement (CUSMA) is eliminated, Canadian products could lose preferential access to the U.S. market, potentially reducing real GDP by around three percent by 2030. This underscores the importance of achieving clarity in trade negotiations to secure economic stability.
Broader Implications and Future Outlook
The tariff dispute's impact extends beyond immediate economic metrics, raising concerns about long-term productivity and financial stability. Bank of Canada Governor Tiff Macklem has warned that prolonged U.S. tariffs could trigger a downward spiral for the Canadian economy, with risks of rising defaults and drying up of lending. This situation is seen as a critical challenge that requires swift resolution to prevent deeper economic scars.
On a positive note, recent updates suggest that fears of a drawn-out trade dispute may be easing, with analysts boosting growth forecasts for Canada this year. The rallying of support to tackle longstanding issues in the Canadian economy, such as productivity challenges, is seen as a silver lining that could strengthen resilience against external shocks. As trade negotiations continue, the focus remains on securing agreements that will bolster confidence and drive recovery in the months ahead.