Bank of Canada Warns New US Tariffs Could Halve Q4 Growth
Bank of Canada Governor Tiff Macklem warns new US tariffs could cut fourth-quarter growth to below 1%, while Middle East tensions threaten to push inflation higher.
New tariffs imposed by the United States could cut Canada's fourth-quarter growth to below 1%, Bank of Canada Governor Tiff Macklem said, warning that the latest escalation in the trade dispute risks prompting businesses to postpone investment and hiring decisions.
Speaking on Monday, Macklem said the central bank must weigh competing pressures as it considers the path of interest rates. Slower growth could pull inflation lower, but the conflict in the Middle East could push prices up as oil costs climb.
Canada's annual inflation rate stands at 3%, above the Bank of Canada's 2% target, and Macklem said it could rise further if crude prices remain near $100 a barrel. The Middle East conflict has affected crude oil prices and also damaged gasoline and diesel capacity, adding pressure to fuel costs.
"If these new tariffs remain in place, growth could be roughly halved in the fourth quarter, to below 1%," Macklem said, adding that the latest escalation could once again cause businesses to delay investment and hiring decisions.
The warning follows a strong second quarter, when Canada's economy posted annualized growth of 3.3% as businesses and households began adjusting their investment and spending plans after almost 18 months of US tariffs. In July, before the new tariffs were announced, the Bank of Canada had forecast third-quarter growth of 1.5%, and economists say recent indicators suggest growth is likely to land around that range.
Macklem said the risk that inflation broadens and becomes more persistent has increased amid the unresolved US-Iran conflict, though there is no evidence so far that 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 persistent," he said.
Since the start of the trade war between the two long-term allies, Macklem said the central bank has seen evidence that businesses are reducing their exposure to tariffs by reworking supply chains and changing sourcing strategies. Firms are also adopting artificial intelligence technology, though its effect on productivity will take time to materialize.
Slower population growth and an aging population are also weighing on labor supply and consumer demand, he added. The rift between the two countries has widened after a prospective trade deal collapsed and Washington imposed fresh tariffs.