Another month of recovery awaits the Canadian economy next Friday as we expect to see a 0.2% increase in May GDP data (more details below), but the outlook is clouded once again by the latest wave of US tariff threats suggesting the path ahead could be bumpier.
It is difficult to clearly assess the ruggedness. First, we are keenly aware that tariffs that have been threatened in the past have often been significantly modified or halted before the implementation date. New US Section 301 (broader global) tariffs imposed on July 24 maintain a duty-free exemption for imports from Canada under CUSMA, and tougher 50% product- and Canada-specific tariffs do not take effect until August 20.
Second, as we emphasized in February 2025, the economic impact will depend on a wide range of factors from how companies creatively address tariffs and the path of the Canadian dollar to government responses and Bank of Canada decisions.
However, here are six early takeaways from this week’s developments:
- The big picture: Canada must be able to handle a new wave of potential tariffs
The targeted sectors will suffer - The new definitions would further exacerbate differences between provinces
- Domestic demand for goods subject to customs duties could provide partial compensation
- The Bank of Canada is likely to hold interest rates this year
- It is essential to monitor business sentiment
We expect the Fed to remain unchanged at Wednesday’s meeting. The June CPI report showed a broad-based deceleration in inflation pressures – a shift from a series of hotter core CPI prints to an immediate cancellation of a rate hike. However, the way forward remains highly uncertain, and depends entirely on future inflation data as the labor market remains resilient.
On Thursday we will receive the US Q2 GDP report, where the main growth is expected to come at an annual rate of 2.4% on a quarterly basis. Much of this growth has been supported by resilient consumer spending, which is expected to accelerate to 2%. Fixed investment in business is likely to expand, offset by net trade which is expected to detract from growth.
