Macklem warns no ‘bounce-back’ for Canadian economy from trade war

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Bank of Canada governor Tiff Macklem warns the Canadian economy will not be able to bounce back from a protracted trade war with the United States, as the impact from the trade disruptions will be structural in nature.

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“In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened,” said Macklem, during a speech in front of the Oakville Chamber of Commerce in Mississauga on Friday. “This time, if tariffs are long-lasting and broad-based, there won’t be a bounce-back.”

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During its last interest rate announcement on Jan. 29, the Bank of Canada provided scenarios illustrating the potential impact of U.S. tariffs on the Canadian economy. In its benchmark scenario, the central bank estimated a protracted trade war with the U.S. would lead to a 2.5 per-cent hit to Canada’s GDP after the first year.

Three days later, U.S. President Donald Trump signed an executive order threatening to slap a 25-per-cent tariff on all Canadian goods and a 10-per-cent tariff on Canadian energy. Trump granted the Canadian government a 30-day pause after it promised to beef up security at the Canada-U.S. border.

On Friday, Macklem noted that, based on Trump’s Feb. 1 executive order, investment in the Canadian economy would decline by 12 per cent and Canadian exports would fall by 8.5 per cent after the first year.

“Lower export revenues would reduce household income,” he said. “And retaliatory tariffs would raise the prices of many consumer goods.”

In the same scenario, the central bank estimates consumption would decline by more than two per cent by mid-2027 and Canadian output would fall by nearly three per cent over two years.

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Macklem argued the only way to offset trade conflict with the U.S., or what he calls a “negative structural change,” is to bring forth positive policies to address it.

He noted that it was good to see governments focus on Canada’s productivity challenges, a problem that has been highlighted by the central bank before. The removal of interprovincial trade barriers, mutually recognizing labour accreditations across jurisdictions and better east-west transportation links are all good measures that will help offset trade friction with the U.S., according to the central banker.

“Again, it’s not for the Bank of Canada to prescribe these policies or investments,” he said. “But higher productivity means higher potential output and more capacity for growth without inflation.”

Macklem also discussed the central bank’s monetary policy framework, which is set to be renewed in 2026. The central bank’s review process is already underway, where it will meet with academics and experts to discuss what is working and what isn’t working in its existing framework.

In past reviews, policymakers asked themselves whether the two per cent inflation target is the right number, which was first agreed upon jointly with the Government of Canada in 1995. This time, however, Macklem says there are no plans to question it, given its efficacy during the pandemic crisis.

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“In my view, now is not the time to question the anchor that has proven so effective in achieving price stability,” he said.

Instead, the central bank will attempt to focus on other issues, such as how to best understand supply shocks, how to measure underlying inflation in a shock-prone world and how shelter inflation distorts measures of core inflation.

“The framework proved itself time and again, and the bar for change is high,” said Macklem. “But the world economy is shifting. At the Bank of Canada, we are committed to ensuring we are as prepared as possible for the changes to come.”

• Email: jgowling@postmedia.com

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