Canada: Trade Shock and GDP Drag – TD Securities

TD Securities analyst Robert Both assessed in a latest report the macroeconomic impact on Canada of new tariffs imposed by the U.S. under Section 338 and Canada's subsequent retaliatory measures. The report estimates that these trade confrontations will cumulatively drag Canada's GDP by approximately 0.3 percentage points by 2027, with the negative impact concentrated around late 2026.

**Trade friction offsets domestic resilience**

Although the Canadian economy has recently shown some resilience, trade policy uncertainty is emerging as a new downside risk. TD Securities previously observed that Canada's trade data had beaten expectations and employment had posted consecutive gains, helping the economy stave off recession concerns. However, rising trade barriers are now eroding business capital expenditure intentions and household consumption confidence. The quantified GDP drag of 0.3 percentage points implies that the growth momentum from exports and services rebound may be partially offset.

**Growth pace disrupted**

The report's assessment of the timing of the impact is noteworthy. While tariff effects will persist over the coming years, the GDP drag is not evenly distributed but concentrated in late 2026. This suggests that despite short-term economic data potentially maintaining a picture of moderate expansion, the lagged effects of trade friction could materialize intensively around end-2026, disrupting Canada's recovery rhythm. Combined with TD Securities' earlier view that the Bank of Canada would hold interest rates steady, a further deterioration in the growth outlook due to the trade war could force a reassessment of the monetary policy stance.

**External environment dominates outlook**

Overall, the analysis portrays a Canadian economic outlook dominated by external policy shocks. With no severe imbalances in domestic fundamentals, the trajectory of U.S. trade actions and the evolution of bilateral negotiations will be the key variables determining whether Canada can avoid a deeper slowdown.