What happens if Trump's tariffs intensify?
The Bank of Canada (BoC) warned Thursday that while the country’s financial system remains stable and resilient, an extended trade war—particularly one involving the United States—could pose a significant risk to economic and financial stability.
In its annual Financial Stability Report, the central bank pointed to mounting uncertainties stemming from ongoing tariff exchanges between the US and Canada. Governor Tiff Macklem emphasized the seriousness of the situation during a press conference in Ottawa, stating that “a long-lasting trade war poses the greatest threat to the Canadian economy. It also increases risks to financial stability.”
The BoC noted that, in the short term, the unpredictability of US trade policy could lead to heightened market volatility and strained liquidity. If left unchecked, these disruptions could escalate into full market dysfunction, the report said.
Risk to economy
Over the medium to long term, the effects could deepen. A sustained global trade conflict would weigh heavily on economic activity, possibly undermining the financial capacity of both households and businesses. This may, in turn, affect the health of Canada’s banks and other financial institutions.
“Our analysis is not a projection, it is an assessment of vulnerabilities,” said Macklem. He added that households with higher levels of debt and no mortgage were especially at risk of defaulting in the face of prolonged financial stress. Such defaults could place further pressure on financial institutions, despite their current robust liquidity positions and access to funding.
“If credit losses occur on a large enough scale, banks could cut back on lending in response,” the BoC report noted. “Struggling households and businesses would have less access to credit to get through tough times. This cycle could exacerbate the economic downturn.”
The report also raised concerns over hedge fund activity, particularly their increased exposure to Government of Canada bonds. In some cases, hedge funds accounted for nearly half of all bond auction purchases. However, many of these positions are leveraged with borrowed funds, raising the risk of a swift market retreat during periods of financial stress.
Still, the BoC found some encouraging signs. As interest rates began to decline last year, household debt levels eased and business insolvencies fell. The central bank said that banks and non-bank financial institutions had improved their capacity to absorb financial shocks.
Ongoing uncertainty
Homeowners with mortgages up for renewal this year or next are generally better positioned due to lower interest rates. Yet, the BoC cautioned that a loss of income or employment could change their financial outlook significantly.
Businesses with pre-existing vulnerabilities—such as high debt levels, weak profitability, or low cash reserves—also remain susceptible to falling behind on debt obligations if economic conditions deteriorate.
What are your thoughts on the potential impact of global trade tensions on the Canadian economy? Share your insights in the comments below.
