{"id":3096,"date":"2025-06-13T16:39:30","date_gmt":"2025-06-13T16:39:30","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/2025\/06\/13\/canadas-economic-outlook-shifting-tides-as-tariff-threats-de-escalate\/"},"modified":"2026-03-31T18:47:33","modified_gmt":"2026-03-31T18:47:33","slug":"canadas-economic-outlook-shifting-tides-as-tariff-threats-de-escalate","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/canadian-analysis\/featured-analysis\/quarterly-canadian-outlook\/canadas-economic-outlook-shifting-tides-as-tariff-threats-de-escalate\/","title":{"rendered":"Canada\u2019s economic outlook: Shifting tides as tariff threats de-escalate"},"content":{"rendered":"\n
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Canadian Outlook<\/h2>\n\n\n\n

It\u2019s been a tough go for Canada so far in 2025. Amid a sizeable trade shock and lingering uncertainty, the economy\u2019s growth outlook is running far softer than most forecasters predicted a year ago.<\/p>\n\n\n\n

The unemployment rate continues to rise, consumer confidence plummeted in the spring and hesitancy around business investment remains. Housing markets have been wobbling<\/a> in several parts of the country despite aggressive interest rate cuts from the Bank of Canada. <\/p>\n\n\n\n

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Meanwhile, well-recognized structural challenges persist. Lackluster business investment further threatens decades-long underperformance in productivity<\/a>\u2014Canada\u2019s economic scarlet letter. And, to add salt to the wound, lower immigration rates mean population growth will no longer provide the same tailwinds it did in recent years.<\/p>\n\n\n\n

It’s easy to see the downside risks and, rightfully, they have taken over the Canadian economic narrative for months. And a 90-day pause on more extreme U.S. reciprocal tariffs dating back to April is set to end in early July.<\/p>\n\n\n\n

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But, while Canada’s economic path forward remains challenging, it appears considerably less treacherous than it did just a few months ago\u2014a narrative that has yet to permeate the Canadian psyche.<\/p>\n\n\n\n

Indeed, compared to the gloomy outlook over the past month, there are some upsides to the economy worth highlighting. There\u2019s a combination of now manageable trade impacts, flexibility in monetary policy, fiscal capacity, and strategic resource advantages.<\/p>\n\n\n\n

With this in mind, we highlight five recent developments have been more positive than many had anticipated.<\/p>\n\n\n\n

1. Most Canadian exports have been exempted from increased U.S. tariffs<\/strong><\/p>\n\n\n\n

Canada has swung from being firmly in the focus of U.S. trade ire in February and March to having the lowest U.S. tariff rate of any major trading partner in April.<\/p>\n\n\n\n

Tariffs on specific products, including steel and aluminum and the non-U.S. content of finished motor vehicles, remain subject to significant U.S. tariffs. But a broader exemption for U.S. imports from Canada to remain duty free under the CUSMA free trade deal since early March appears to be an effective shield against tariffs for most Canadian exports.<\/p>\n\n\n\n

By our count, 86% of Canadian exports<\/a> to the U.S. last year would still be duty free under current rules. The U.S. Census Bureau in April reported almost 90% of U.S. imports from Canada remained duty free in April and the average effective tariff on U.S. imports from Canada was 2.3%\u2014up significantly from essentially zero in January\u2014but the lowest of any major U.S. trade partner.<\/p>\n\n\n\n

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2. ‘Hard’ spending numbers have held up better than ‘soft’ confidence measures<\/strong><\/p>\n\n\n\n

Consumer sentiment surveys in Canada\u2014sometimes called \u201csoft\u201d economic data because they track how households are feeling more than how they’re actually spending\u2014cratered to record lows in March as U.S. trade tensions ratcheted up. If that was the only indicator we had, it would clearly suggest the economy was in recession then.<\/p>\n\n\n\n

But actual spending data has not matched that scale of weakness. To be sure, not all economic data has been strong\u2014employment has weakened in trade-exposed sectors like manufacturing and transportation. But, broader consumer spending has remained relatively resilient. The unemployment rate has edged higher, but job postings on Indeed.com have shown signs of stabilization<\/a> in May.<\/p>\n\n\n\n

3. BoC has room to cut rates further if needed<\/strong><\/p>\n\n\n\n

The BoC began lowering interest rates well ahead of many global peers with significant 225 basis points of monetary policy easing already in the pipeline. This will likely to grow in impact as the lagged effects of rate cuts work their way through the economy.<\/p>\n\n\n\n

We think the central bank is now at the end of its cutting cycle and do not expect further reductions. But, that is contingent on the economic growth backdrop and labour markets stabilizing.  Should the BoC want or need to respond further, it has flexibility in the inflation data to do so.<\/p>\n\n\n\n

Yes, the BoC was clearly unnerved recently by firmer-than-expected inflation in April. But, critically, that upward surprise likely had more to do with resilient consumer spending, particularly on non-housing related discretionary services, than with the impact of tariffs.<\/p>\n\n\n\n

We also expect limited impact from Canada’s retaliatory import tariffs on inflation, and that means monetary policy will remain flexible to act as a traditional buffer for the economy. The central bank will need to take into account potential additional support that could come from government spending (see below), but, overall, it has the room to cut interest rates further if it needs to.<\/p>\n\n\n\n

4. Fiscal capacity and strategic advantages<\/strong><\/p>\n\n\n\n

There are two streams of fiscal support in play in Canada that produce upside risks worth monitoring.<\/p>\n\n\n\n

First, as we argued here<\/a>, Canada maintains meaningful capacity to buffer against economic shocks if required, regardless of the political landscape. Government net debt levels are still relatively low compared to other advanced economies. That is less true compared to the shrinking number of triple-A rated economies<\/a>, but both provincial and federal governments have signalled willingness to step in and support trade impacted sectors if and as needed.<\/p>\n\n\n\n

This fiscal room provides an important backstop for the economy that shouldn’t be underestimated, particularly compared to its global peers (and the U.S.). Moreover, it is a shift from earlier this year when it appeared Canada might need to buffer a trade shock alone. Now, global peers are engaged in fiscal expansion that helps to maintain Canada\u2019s relative fiscal place.<\/p>\n\n\n\n

A formal spending plan has yet to be presented by the newly elected federal government, but there has been movement on a range of items that can provide support to 2025-2026 growth. Action on interprovincial trade barriers could pay long-run dividends helping to support investment and productivity growth. Tax deferrals, loan programs, and employment insurance measures have been implemented to help trade-related sectors through shorter-run disruptions. And now announcements related to defence<\/a> could add significantly to growth in 2026.<\/p>\n\n\n\n

Second, the U.S. induced trade shock has turned global attention towards the needs of the global economy in the future, and which countries are best equipped and positioned to support them. Canada\u2019s resources\u2014agriculture, energy, and critical minerals\u2014are increasingly well positioned to support the needs of the global economy, particularly as it seeks to expand AI\/data and defence spending. This represents a moment for Canada to invest in itself and fulfill this need, but it may also be the seeds of global partners recognizing the opportunities within Canada.<\/p>\n\n\n\n

5. U.S. growth resilience and exceptionalism<\/strong><\/p>\n\n\n\n

Canadian exporters appear to be less targeted with specific U.S. tariffs, but they are still tied to the performance of the U.S. economy, particularly in the heavily trade integrated manufacturing sector.<\/p>\n\n\n\n

This was a problem for Canada in the immediate aftermath of Liberation Day on April 2. Broad based global tariffs imposed by the U.S. on all of its trade partners raised the risk of a U.S. recession and, therefore, a Canadian one as well. Now, however, the de-escalation of U.S. tariffs support a slow, but resilient outlook for the U.S, improving Canada\u2019s prospects as well.<\/p>\n\n\n\n

Problematically, that U.S. resilience still appears to be mostly coming from the exceptionally large government budget deficit, and household spending on services that have little direct Canadian import content.<\/p>\n\n\n\n

In the U.S. industrial sector\u2014where trade ties are much closer\u2014manufacturing employment was down 0.7% year-over-year in May and early data on job openings shows hiring demand continuing to slow as aggressive tariffs on most of the rest of the world push costs higher, and add to uncertainty. Still, we do not expect a U.S. recession this year, and that is good news for Canadian exporters that are still, in most cases, able to access the U.S. market duty free.<\/p>\n\n\n\n

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Provincial overview<\/h2>\n\n\n\n

The U.S.\u2019s targeted approach to tariffs on Canadian exports is poised to have varying impacts on provincial economies with manufacturing-heavy ones in central Canada most exposed.<\/p>\n\n\n\n

Increased steel and aluminum duties, if sustained, would compound existing pressures\u2014particularly in Ontario where growth is projected to be 1.3% this year, along with Quebec. Manitoba (1.2%) and New Brunswick (1.2%) are similarly expected to trail the national average with trade exposure.<\/p>\n\n\n\n

We see more resource-dependent economies maintaining leadership positions with Newfoundland (2,6%), Alberta (2.4%) and Saskatchewan (2.2%) continuing to outpace most other regions supported by operations of key energy infrastructure creating export opportunities beyond traditional U.S. markets.<\/p>\n\n\n\n

Export diversification and natural resource strength will partly buffer British Columbia (1.2%) as well, though slumped construction and real estate investment is unlikely to support increased growth this year.<\/p>\n\n\n\n

Prince Edward Island (1.7%) and Nova Scotia (1.6%) are on moderating growth trajectories\u2014 even though they are still above the national average with stronger public sector investment helping to cushion trade tensions and slowing population growth.<\/p>\n\n\n\n

Real GDP growth<\/h3>\n\n\n\n
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Source: Statistics Canada, RBC Economics<\/em><\/p>\n\n\n\n

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BRITISH COLUMBIA \u2013 Construction weakness dampens outlook<\/h3>\n\n\n\n

We expect British Columbia’s economic expansion to remain relatively stable from 2024. Slumping real estate activity and construction investment are key concerns, along with the impact of trade tensions\u2014prompting a slight tamp down of our 2025 growth forecast, to 1.2% from 1.5%.<\/p>\n\n\n\n