Overview

US tariffs are significantly higher than they were at the start of 2025, and US trade policy remains unpredictable. Inflation is near 2%, although underlying price pressures have picked up. With uncertainty about US trade policy still high, the outlook for the Canadian economy remains clouded.

The global trade conflict continues to evolve. Since the time of the April Report, extreme trade tensions between the United States and China have receded. The US administration has reached agreements on tariffs with some countries, which have raised US tariffs significantly from January levels. The United States has also doubled its tariffs on imports of steel and aluminum and has threatened high, broad-based tariffs on many other trading partners if agreements are not reached soon.

Economic scenarios for the outlook

At the beginning of 2025, shifting US trade policy increased uncertainty about the economic outlook.

This trade-related uncertainty has two layers. The first layer is around US trade policy. It is difficult to know what tariffs and countermeasures will be imposed, how long tariffs will last and how trade negotiations will play out. The second layer of uncertainty is about how households, businesses and governments will react and adapt to tariffs.

In the April Report, the Bank of Canada presented two illustrative scenarios that explored different paths for US trade policy. This was done to address the first layer of uncertainty. To address the second layer of uncertainty, the Risks section focused on how the economy would respond to a given level of tariffs.

Since April, the risk of a severe and escalating global trade conflict has diminished, and there is some clarity around what tariffs will look like. Nevertheless, how US trade policy will unfold remains highly uncertain. And while recent data have helped reduce some of the uncertainty around the impacts of tariffs, it is still too early to confidently project the effects of the tariffs on economic growth and inflation. In this environment of elevated uncertainty, scenarios continue to be a useful tool for considering potential outcomes.

Therefore, the July Report presents an economic scenario conditional on trade policies in place or agreed on as of July 27, 2025—the current tariff scenario—rather than a conventional forecast. This Report also includes two alternative scenarios, one in which tariffs are reduced and another in which they are substantially increased—the de-escalation scenario and the escalation scenario, respectively. Taken together, these scenarios encompass a range of paths for trade policy and the Canadian economy.

• For details on the scenarios, see the Scenario assumptions section.
• The economic outcomes of the current tariff scenario can be found in the Outlook and Global economy sections.
• The economic outcomes of the alternative scenarios are explored in In focus: The path of US tariffs remains uncertain.

Reflecting the high level of uncertainty, the information provided in this Report is somewhat less detailed than in a typical base-case projection. Table 2, Table 3 and Table 4 compare the current tariff scenario to the January Report, which was the last report to present a base-case projection.

As in the April Report, risks related to how businesses, households and governments will react and adapt to tariffs are examined in the Risks section. Other non-tariff risks are also discussed.

A summary of economic conditions

Consumer price index (CPI) inflation was 1.9% in June. Changes in indirect taxes, such as the HST/GST holiday and the removal of the consumer carbon tax, have impacted CPI inflation since late 2024. When indirect taxes are excluded, inflation rose to 2.5% in June 2025 from around 2% in the second half of 2024. This increase was mainly because inflation in non-energy goods prices rose, more than offsetting an easing in inflation in shelter services prices. Similarly, most measures of core inflation have picked up since late 2024. Overall, underlying inflation is now assessed to be around 2½%.

Growth in the Canadian economy in the first quarter of 2025 was stronger than expected at 2.2%, largely due to a temporary surge in exports in anticipation of US tariffs. Growth is estimated to have contracted in the second quarter. While exports and business investment have fallen, growth in consumer spending has been resilient, and spending by government has picked up.

In the current tariff scenario, Canada’s economic growth is modest at 1% in the second half of 2025. Growth then rises, reaching 1.8% in 2027 as the effects of trade policy uncertainty fade and as global demand and exports increase modestly. Inflation remains close to 2% throughout the scenario horizon. The upside pressures and the downside pressures on inflation are roughly offsetting and dissipate over time.

In the de-escalation scenario, growth is stronger, excess supply is reduced and the direct upward pressure on inflation from tariffs is lower. In the escalation scenario, the Canadian economy contracts through the rest of 2025 and inflation rises temporarily above the 2% target due to the direct cost pressures from tariffs.