Bank of Canada says new US tariffs could slash fourth quarter growth
US tariffs could drive Canada's Q4 growth below 1%
New US tariffs could slash Canada's fourth quarter growth to below 1%, reflecting a new wave of uncertainty that threatens to hit investment and hiring, Bank of Canada Governor Tiff Macklem said today (21 September).
Macklem said that as the bank pondered what to do with rates, it had to take into consideration the fact that while slower growth could drag inflation downwards, the Middle East conflict could push it up as oil prices soar.
Canada's annual inflation rate is 3%, well above the bank's 2% target, and it could edge up if oil prices remain near $100 a barrel, he said.
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Canada's economy rebounded in the second quarter and posted annualized growth of 3.3%, as businesses and households started to adjust and plan investments and spending after almost 18 months of US tariffs.
But as a prospective trade deal collapsed between the two long term allies, the rift between them has widened with new tariffs from the US.
"The latest escalation could once again cause businesses to delay investment and hiring decision," Macklem said.
"If these new tariffs remain in place, growth could be roughly halved in the fourth quarter, to below 1%."
In July, before the tariffs were unveiled, the BoC had forecast a third quarter growth of 1.5% and economists say recent indicators show it will most likely be around that range.
The Middle East conflict has not only impacted crude oil prices but also damaged gasoline and diesel capacity, piling up more pressure on the cost of fuel.
Macklem said that with no easing of the US-Iran conflict, the risk that inflation broadens and becomes more persistent has increased, although there is no evidence so far that the higher fuel costs are spreading to other goods or services.
"We don't want to raise our policy rate and restrain growth if inflationary pressures are contained. But nor do we want to be too slow to respond if inflationary pressures are being more persisent," he said.
Macklem said that since the start of the trade war between the US and Canada, the BoC was seeing evidence that businesses were reducing their exposure to tariffs by changing supply chains and changing sourcing strategies.
They are also adopting AI technology but its impact on productivity will take time to reflect.
That said, slower population growth and an aging population are also hitting labor supply and consumer demand, he added
