Trade tensions likely to hasten an economic slowdown, report suggests
Canada’s economy has yet to witness the sharp downturn feared by many as a result of US president Donald Trump’s trade war. But it’s still on course for a recession, according to new report from the Canadian Federation of Independent Business (CFIB), which expects a contraction in both the second and third quarters of 2025.
That likely slowing of economic activity, the CFIB said, has been spurred by “persistently low business confidence” driven both by trade tensions and a weakening manufacturing sector.
Economic downturn projected
The CFIB forecasts a 0.8% decline in GDP for the second quarter, followed by another 0.8% drop in the third. This downturn is largely due to shrinking private investment, which is projected to fall by 13% in the second quarter and by another 6.9% in the third.
Simon Gaudreault, CFIB’s chief economist, noted that the “‘one step forward, one step back’ trade situation is driving low business confidence, translating into paused or cancelled investments.” He added, “As trade tensions drag on, more businesses will be slowly adjusting to tariff threats and finding alternatives.”
Supply chain issues continue to mount, with an increasing number of firms reporting disruptions since March, particularly in wholesale and manufacturing sectors.
Growing concern over economic uncertainty
Recent Bank of Canada (BoC) surveys underscore growing economic anxiety. According to the BoC’s Survey of Consumer Expectations: Second Quarter, households are pulling back on spending amid uncertainty and rising fears of job losses. Young Canadians reported a higher-than-average risk of unemployment.
“The trade conflict is leading consumers to become increasingly cautious about their spending plans and to change their spending behaviour,” the report said. It also noted a consumer pivot toward Canadian-made goods and domestic travel.
A corresponding Business Outlook Survey showed similar concerns among employers. It found that “sales outlooks remain pessimistic overall” and that “most firms expect to maintain current staffing levels and limit spending to regular maintenance over the next 12 months.”
BoC weighs options
Despite the grim outlook, stable inflation may give the BoC some flexibility. Statistics Canada reported annual inflation rose to 1.9% in June from 1.7% in May, while core inflation held steady near 3%. A stronger-than-expected gain of 83,000 jobs in June further complicates the outlook.
BoC Governor Tiff Macklem, speaking in June, acknowledged, “There is no question that uncertainty is bad for business.” He cautioned, “The longer these tariffs go on, the longer this uncertainty goes on, the more it is going to weigh on the Canadian economy.”
The central bank’s key interest rate currently sits at 2.75% after seven consecutive cuts. Its next rate announcement is scheduled for July 30, with analysts divided on whether the BoC will hold or adjust rates further.
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