Canada: Growth Rebound Overshadowed by Trade War Clouds – BBH

Lead: Brown Brothers Harriman analyst Elias Haddad expects Canada's second-quarter real GDP to rebound strongly, with growth potentially exceeding the Bank of Canada's forecast, driven by both domestic demand and exports.

**Dual Engines of Domestic Demand and Exports**

Haddad believes the Canadian economy will show significant recovery momentum in the second quarter. The resilience of domestic consumption and investment, combined with improvements in the export sector, forms the core driver of above-expected growth. This assessment suggests that Canada's economic fundamentals have a certain buffer against external shocks, potentially delivering strong data in the near term.

**Escalating Trade War as the Biggest Wildcard**

However, this optimistic outlook is being overshadowed by thick trade war clouds. According to the Associated Press, last-minute U.S.-Canada trade talks collapsed on Friday evening, with both sides trading blame and imposing new tariffs. The U.S. even invoked Section 338 of the Tariff Act from the Great Depression era, imposing tariffs of up to 50% on Canada. Canadian Prime Minister Carney has made clear that U.S. demands are "unacceptable," and that bilateral relations have undergone a fundamental shift. This tit-for-tat confrontation could quickly erode growth expectations supported by domestic demand and exports.

**Long-Term Game of Supply Chain Restructuring**

Trade war pressures are forcing Canadian businesses to rethink supply chain configurations. According to the BBC, amid tariff shocks, a patriotic "buy Canadian" consumption wave has emerged domestically, with some retailers beginning to drop U.S. suppliers. Meanwhile, some companies, such as auto parts and agricultural product processors, are considering relocating production lines back to Canada to mitigate geopolitical risks and enhance product value. While this structural adjustment may benefit Canadian manufacturing in the long term, short-term capital expenditures and operational transition costs will add new variables to economic growth.