Overview

The Canadian economy is adjusting to steep US tariffs on several industries and coping with elevated uncertainty. Tariffs have led to a fall in the demand for Canadian goods, affecting the broader economy. The reconfiguration of global trade and domestic production is also leading to higher costs. Total inflation has been around 2%, while underlying inflation has continued to be about 2½%.

With US tariffs and limited Canadian counter-tariffs in place, the effects of the trade conflict on growth and inflation in Canada are becoming clearer. Exports to the United States have fallen, and business investment has declined. The structural shift in the Canada-US trade relationship has put the economy on a lower path. At the same time, the reconfiguration of global trade and the restructuring of the Canadian economy are adding costs and putting upward pressure on inflation.

Considerable uncertainty remains around US tariffs and how changes to global trade relationships will affect economic growth and consumer prices in Canada. This uncertainty includes the review of the Canada-United States-Mexico Agreement.

How other major structural changes—such as shifting demographics and the adoption of artificial intelligence—will affect the Canadian economy is also unclear. The effects of these developments on output and inflation will play out over many years.

Monetary policy cannot offset the long-term implications of US tariffs or other sources of structural change. The primary focus of monetary policy is to maintain low and stable inflation.

A return to a base-case projection

In the first half of 2025, the trade conflict with the United States led to a sharp rise in uncertainty. Faced with an unpredictable environment, the Bank of Canada used scenarios rather than base-case projections in both the April Report and the July Report. These scenarios illustrated different paths for US trade policy and provided a range of possible outcomes for the Canadian economy.

Since the extreme uncertainty of the spring, the United States’ intention to impose universal tariffs on many countries and steep tariffs on specific sectors has become apparent, as have the responses of other countries. Tariffs have now been in place for many months, and their impact on the Canadian economy has become clearer. Therefore, this Report returns to the usual practice of providing a base-case projection. The current projection is presented relative to January, which was the last Report with a base-case projection.

However, considering a wider-than-usual range of risks to the outlook remains important. The United States continues to broaden the set of goods subject to tariffs, and, more generally, tariffs could both escalate and de-escalate. In addition, the pace and scope of the restructuring of global trade routes and supply chains will play out over time and have a significant effect on economic developments going forward.

A summary of economic conditions

After being close to 2% for several months, consumer price index (CPI) inflation was 2.4% in September. Inflation excluding taxes was 2.9%, up from just over 2% in recent months. The preferred measures of core inflation have been sticky at around 3%, while a broader set of indicators suggest underlying inflation has persisted around 2½%.

The Canadian economy contracted in the second quarter, with growth in gross domestic product (GDP) at -1.6%. The contraction was largely due to the disruptive impact of tariffs on exports and the effect of heightened uncertainty on business investment. Growth is estimated to be weak in the second half of 2025, averaging about 0.75%. While exports and business investment will likely decline further, household and government spending are supporting growth.

Canada’s GDP growth is projected to then strengthen gradually, with annual growth averaging 1.4% over 2026 and 2027. This recovery is slow because Canadian businesses need time to adjust to the new trade reality and a weak labour market is weighing on household spending. In addition, population growth is assumed to remain low. CPI inflation remains close to 2% throughout the projection horizon.

The global economy has been resilient to the historic rise in US tariffs, but it is showing signs of slowing. Trade volumes are being rerouted away from the United States as global exporters look for ways to avoid tariffs. The trade conflict is also affecting investment decisions in many countries.