{"id":13758,"date":"2026-08-13T17:29:23","date_gmt":"2026-08-13T17:29:23","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/?p=13758"},"modified":"2026-08-13T20:07:01","modified_gmt":"2026-08-13T20:07:01","slug":"solid-canadian-growth-meets-narrow-tariff-headwinds","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/financial-markets-monthly\/solid-canadian-growth-meets-narrow-tariff-headwinds\/","title":{"rendered":"Solid Canadian growth meets narrow tariff headwinds"},"content":{"rendered":"\n
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Highlights:<\/strong><\/h4>\n\n\n\n
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Canada\u2019s economy bounced back strongly in Q2<\/strong>. Hiring picked up to drive the unemployment rate lower. Domestic demand remained resilient, while net trade recovered from a soft Q1.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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U.S. Section 338 tariff threats won\u2019t derail overall growth in Canada<\/strong><\/strong>, as they target a narrow base of Canadian products. Impact to targeted producing regions and industries will be more significant.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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Broader U.S. tariff rates globally have continued to edge lower,<\/strong> consistent with our outlook for a resilient U.S. economy<\/a> benefiting from major infrastructure buildouts and government spending.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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The Federal Reserve is still expected to remain on hold this year (and next)<\/strong> although sticky inflation leaves risks around that base case forecast tilted towards potentially needing to hike.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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The Bank of Canada is more comfortably on hold<\/strong> amid signs of a firming economy and soft core inflation prints. We expect modest adjustment hikes in 2027 should these trends persist.<\/p>\n<\/div>\n<\/div>\n\n\n\n

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Forecast changes:<\/h3>\n\n\n\n

Latest U.S. tariff threats tangible but manageable<\/strong><\/strong><\/h4>\n\n\n\n

The latest round of U.S. Section 338 tariff threats target around 5% of Canadian exports to the U.S. including products like plastics, clothing and electrical equipment.<\/p>\n\n\n\n

If implemented, those measures would have a significant impact on demand for targeted products, but are not expected to have a meaningful impact on our headline forecasts. That\u2019s in line with other product-specific measures so far that have had pronounced, but targeted effects on the Canadian economy.<\/p>\n\n\n\n

Overall, we estimate 0.4% of Canada’s GDP and jobs (using latest value added in exports data from 2024) would be directly impacted (see more details on industry specifics below).<\/p>\n\n\n\n

Solid backward-looking data keeps BoC on hold<\/strong><\/strong><\/h4>\n\n\n\n

U.S. tariff policy remains a key source of uncertainty, but economic data in Canada has been strengthening all around.<\/p>\n\n\n\n

Q2 real GDP growth is tracking well above our prior expectations, supported by resilient domestic spending from households, businesses and governments, as well as a recovery in net trade from auto-related softness in Q1. Housing activities have picked up, and the labour market has also improved with the unemployment rate easing lower.<\/p>\n\n\n\n

The key question is how much of Q2’s strength will persist. Early July data\u2014including rising consumer spending<\/a> and a notable increase in total hours worked\u2014supports our cautiously optimistic outlook that the economy will continue to expand both in aggregate and per-capita over the rest of 2026.<\/p>\n\n\n\n

Gradual improvements in the economy and labour market should be sufficient to keep the BoC on hold through 2026, before diminishing economic slack prompts moderate rate hikes in 2027.<\/p>\n\n\n\n

U.S. tariffs still easing under Section 301 measures<\/strong><\/strong><\/h4>\n\n\n\n

We risk sounding repetitive, but recent tariff changes\u2014including the transition from now-expired Section 122 tariffs to Section 301 measures\u2014should still leave U.S. tariffs on balance lower, not higher.<\/p>\n\n\n\n

Importantly, new Section 301 tariffs, like their Section 122 predecessor, apply to a much narrower range of imports than initial broad-based IEEPA tariffs. They exclude a long list of products in Annex II of the announcement (accounting for more than 50% of U.S. imports in 2025), imports already subject to Section 232 tariffs (20% of U.S. imports in 2025), and CUSMA-compliant imports from Canada and Mexico.<\/p>\n\n\n\n

This leaves roughly a quarter of total imports subject to Section 301 tariffs. Threatened Section 338 tariffs would add to overall tariffs, but very marginally, since the 50% tariff rate only affects 0.5% of total U.S. imports from the world.<\/p>\n\n\n\n

Fed is still expected to hold but is increasingly data dependent<\/strong><\/strong><\/h4>\n\n\n\n

Easing tariff headwinds remains broadly consistent with our expectation that strong U.S. growth, supported by structurally large government spending, will persist. The Fed is still left with the tough call on whether current interest rates are restrictive enough to keep pressure on inflation, and bring it back to the 2% target.<\/p>\n\n\n\n

Answering that question is difficult and leaves the Fed more data dependent than usual for near-term decisions. Additionally, markets were rattled when new Fed Chair Kevin Warsh’s abruptly ended forward guidance and cut off the Fed’s communication about its reaction function.<\/p>\n\n\n\n

Recent data suggests a tight U.S. labour market despite downside employment surprises that partly reflect demographic shifts. Inflation excluding energy showed some relief in June and July, which should be enough to keep the Fed on hold for now, albeit uncomfortably. Indeed, the hiking bias remains real and could still turn to action this year if inflation turns around and reaccelerates.<\/p>\n\n\n\n

Summary of forecast changes in August:<\/h4>\n\n\n\n