The path of US tariffs remains uncertain

Because the trade environment remains so uncertain, the path for Canadian growth and inflation is less clear than usual. If the trade conflict were to escalate or de-escalate, those shifts would alter economic outcomes.

Since January, the United States has threatened, imposed, paused and reinstated tariffs on many of its trading partners. It has negotiated agreements with some countries, but many others still face threats of significant new tariffs. These policy shifts have happened quickly and sometimes without warning.

As a result, this Report presents a current tariff scenario instead of a base-case projection as well as two alternative scenarios—a de-escalation scenario and an escalation scenario. When taken together, these scenarios encompass a range of potential outcomes.

The current tariff scenario is presented in the Outlook and Global economy sections. This section presents the de-escalation and escalation scenarios.

In the de-escalation scenario, tariffs are lower than in the current tariff scenario, and the degree of trade uncertainty decreases. Compared with the current tariff scenario:

• economic growth in Canada rebounds faster once tariffs are reduced and uncertainty eases
• inflation in Canada is lower over most of the scenario horizon, primarily because tariffs are lifted

In the escalation scenario, trade negotiations deteriorate, causing tariffs to rise significantly. Compared with the current tariff scenario:

• economic growth in Canada slows markedly, with gross domestic product (GDP) about 1.25% lower by the end of the scenario horizon
• inflation rises faster, because of the increase in tariffs, to around 2.5% in 2026, before stabilizing around 2% in 2027

De-escalation scenario

In this scenario, the United States lowers its tariffs against Canada and other countries. In response, China significantly reduces its counter-tariffs, while Canada removes them. Although uncertainty declines somewhat, it persists due to lingering concerns about the stability of US trade policy (see the Scenario assumptions section).

Economic growth in Canada rebounds over the second half of 2025. It then eases to a more moderate pace over the rest of the scenario horizon. GDP growth is stronger than in the current tariff scenario because the removal of tariffs and reduced uncertainty lead to stronger growth in exports and domestic demand. The level of GDP is roughly 0.5% higher at the end of the scenario horizon.

Consumer price index (CPI) inflation stays below the 2% target until late 2026. It then averages around 2% in 2027. Inflation in 2026 is lower than in the current tariff scenario because tariffs are lifted.

Chart 27: Economic activity picks up in the de-escalation scenario

Quarterly data

Export growth rebounds as US demand returns

Growth of Canadian exports strengthens significantly into late 2026. This boost can be explained by lower tariffs, which result in increased US demand for Canadian exports. Export growth then moderates as the positive impact from the new trade agreement fades.

Similarly, import growth in Canada rises sharply over roughly the same time frame, fuelled by robust consumer spending and business investment. However, this momentum slows in 2027.

Final domestic demand improves

Growth in final domestic demand rises and remains robust from the second half of 2025 into the first quarter of 2026. Growth in both consumption and residential investment is strong, supported by increases in disposable income. Disposable income rises mostly because of the recovery in export demand, which strengthens labour market conditions. After this initial surge, growth in household spending returns to a more moderate pace.

Businesses become more confident in the strength of demand once tariffs are lifted, leading to a surge in business investment over roughly the next year.

Escalation scenario

In this scenario, the United States implements most of the tariff increases that it has threatened on its global trading partners. However, the increases in tariffs on Canada and Mexico are somewhat less severe than those imposed on other nations. Countries retaliate by further increasing their own tariffs on the United States. Trade uncertainty remains elevated over the scenario horizon (see the Scenario assumptions section).

The intensifying trade conflict leads to a recession that lasts for three quarters. Growth begins to recover slowly in 2026 as the economy adjusts to the new global trade regime. The level of GDP is around 1.25% lower than in the current tariff scenario at the end of 2027.

CPI inflation peaks at just above 2.5% in the third quarter of 2026 before declining to 2% in 2027. Inflation is higher in 2026 than in the current tariff scenario due to increased tariffs, which more than offset slower growth and lower energy prices.

Higher tariffs slow economic activity

GDP contracts over the rest of 2025 as the trade conflict intensifies (Chart 29). Growth picks up slowly over the first half of 2026 as the economy adjusts to higher tariffs and then strengthens to an average of around 2%. Because GDP growth is weaker than potential output growth, the output gap widens. Significant excess supply remains at the end of the scenario horizon.

Chart 29: Economic activity is weak in the escalation scenario

Quarterly data

Tariffs drastically reduce trade

Export growth contracts into the middle of 2026 because of higher US tariffs on Canadian imports and a global economic slowdown. After that, export growth resumes as Canadian exporters adjust to the new trade environment.

Imports decline until the first quarter of 2026 as counter-tariffs and weak business investment reduce demand for inputs from abroad. Import growth then picks up, supported by growth in domestic demand.

Domestic demand moderates due to trade pressures

The intensifying global conflict slows growth in final domestic demand in Canada. Household purchasing power weakens because of deteriorating labour market conditions. Less demand from the United States causes some exporters to reduce hours and lay off workers. Additionally, a decline in Canada’s terms of trade weighs on household incomes, and higher tariffs raise the prices of imports, such as food and consumer goods.

Business investment falls because of higher import costs and reduced demand for capital goods due to lower exports. However, as the trade environment begins to stabilize, investment growth turns positive.