BMO analysis outlines scenarios for Canada as USMCA review looms
As the United States–Mexico–Canada Agreement (USMCA) review draws near, the Bank of Canada (BoC) is at a crucial moment in the ongoing trade dispute, with BMO’s latest analysis warning that even the best-case scenarios will still dampen business confidence and investment.
Aaron Goertzen, BMO senior economist and director, economics, led the report, which lays out three different scenarios for the US-Canada economic relationship.
“At the other end of the spectrum, a large increase in tariffs would virtually assure a significant economic downturn in Canada, and, while the impact in the US would be less dire, it would add to other headwinds,” Goertzen said.
Scenarios for the path ahead
The baseline “Muddle Through” scenario assumes the US maintains a 7% average tariff on Canadian imports, with Canada responding at 2%.
This would keep the North American economic project largely intact, but Goertzen cautioned that “it is doubtful that any agreement could fully assuage fears about a future flare-up in tensions.”
In this case, BMO projects Canadian GDP growth to average 1.3% in 2025 and 2026, with the BoC expected to cut rates to 2.00% by early 2026.
A more adverse “No Special Treatment” scenario would see the US impose a 15% tariff and Canada respond at 5%.
“Growth would slow noticeably and, over time, economic activity could fall around 2.5% below pre-tariff trends. A technical recession would be a strong possibility, but any downturn would probably be short-lived,” Goertzen said.
In the “Continental Divide” worst-case, a 35% US tariff and 15% Canadian retaliation would “virtually assure” a Canadian recession, with GDP potentially falling 5% below pre-tariff trends.
“A 35% tariff in the US market would leave Canadian products at an enormous disadvantage to both U.S. and overseas competitors and would be too large to absorb into profit margins. Exports would plunge, and so too would business investment,” Goertzen said.
Canada’s economy posted its first monthly growth in four months, raising questions about how much room the Bank of Canada will have to cut rates further as policymakers balance signs of resilience with ongoing risks.https://t.co/Y4OhOBMndz
— Canadian Mortgage Professional Magazine (@CMPmagazine) September 26, 2025
Implications for the Bank of Canada
Each scenario carries distinct implications for the BoC. Under the baseline, the bank is expected to ease policy, but further shocks could force deeper cuts.
“The Bank of Canada would help stanch the damage, but its response would be constrained by concern about pricing pressures,” Goertzen said. In the worst-case, rates could drop to 1%—but the loonie would likely weaken, and inflation could rise as much as 4% over time.
The BMO report underscores the deep integration of the US and Canadian economies, noting that “Canada famously relies on the US as a destination for about 75% of its merchandise exports, equivalent to 19% of GDP in 2024.”
With the USMCA review coming up in July 2026 and the US pushing for new terms, Canadian policymakers and the BoC face high stakes.
As Goertzen notes, “It’s difficult to overstate the degree of economic integration between the US and Canada… Both sides would find it more difficult to compete against overseas regional value chains. On both sides, real incomes would be relatively lower and consumer choice relatively narrower.”
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