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While the Governor Bank of Canada Tiff Mackklem insists that there is a restriction on the response of monetary policy on the tariff war, he has a clear view of the damage he could have on the Canadian economy.
“Increased trade friction with the US is a new reality,” he said in a speech in Toronto area on Friday. Although the time, degree and duration of the tariff are uncertain, the governor said that it looks inevitable that “a structural change on us.”
Mackklem presented a chain reaction in the event that the US imposed 10% of the tariffs on energy products and 25% of the levies to everything else that the Earth buys from Canada, which would also restore retribution on certain products.
All in all, the US-Kanada Tariff War would scab Canadian production for almost 3% over two years and “wipe growth” during this period, Mackklem said. Although the economy can be expanded again after the initial shock, the long -term growth path would be 2.5% lower than the scenario where there was no tariff.
Because Canadian goods have become more expensive in the United States, demand for these products would collapse. The bank sees exports falling by 8.5% in the year after the tariffs enter into force, and exporters reduced production and released workers.
“The shock would be felt across Canada,” because exports to the US for about a quarter of national income, he said.
Lower export revenues would reduce household income, and the tariff retaliation would temporarily increase the consumer prices above the goal of 2%and both would refuse consumer consumption. The bank expects the consumption to reduce by more than 2% by the middle of 2027.
Canadian dollar depreciation would increase the prices of imported goods and services, and the integrated supply chains between the two countries can add costs in the multiple stages of production.
With the weakening of the demand for exports and consumers, companies would reduce the consumption of investment. Higher costs and lower margins get these expenditures even more. The bank predicts the investment that it falls by almost 12% by 2026.
Mackklem reiterated that the bank is now “better positioned to contribute to economic stability” with an inflation that is now on Target and warned that there is a restriction on the response to monetary policy.
