OTTAWA - "Some resilience" — those were the two words Bank of Canada governor Tiff Macklem used last week to describe how the Canadian economy is holding up under the weight of U.S. tariffs.
Just a few days later, U.S. President Donald Trump added 35 per cent tariffs on Canadian goods to a running tally that includes hefty duties on steel, aluminum, automobiles and, more recently, semi-finished copper.
With tariffs piling up over the past few months, economists say Canada's economy is starting to show cracks — but few signs of collapse.
TD Bank economist Marc Ercolao conceded it's a "bit of surprise" to see the economy holding up against a massive disruption from Canada's largest trading partner.
"Many months ago, ourselves — as well as other economic forecasters — had an outlook for a much weaker Canadian economy. Obviously, that isn't manifesting now," he said in an interview.
"We are avoiding the worst-case scenario."
On Thursday, Statistics Canada gave a glimpse at how the economy wrapped up the second quarter of the year when many of those tariffs came into full effect.
While the agency sees a couple of small contractions in real gross domestic product by industry in April and May, its flash estimates show the economy rebounding somewhat in June.
If those early readings pan out, StatCan said that would be good enough for flat growth overall on the quarter.
Some of those results are distorted by volatility — businesses rushing to get ahead of tariffs boosted activity in the first quarter, and that's giving way to weakness in the second quarter, for example.
It's still hard to pinpoint exact impacts tied to tariffs, Ercolao said, but a broad trend is emerging.
"What we can say over the last six months or so is that economic activity is somewhat flatlining," he said.
Services sectors are holding up relatively well, but Ercolao said export-heavy industries such as manufacturing and transportation are bearing the brunt of the impact.
In an attempt to shore up some of that weakness, the federal government has announced various programs to support tariff-affected workers and broader plans to accelerate defence and infrastructure spending.
Macklem noted during his press conference Wednesday that business and consumer confidence are still low, but have improved according to the central bank's recent surveys.
And while some trade-exposed sectors have faced job losses and the unemployment has generally trended upward to nearly seven per cent, employers elsewhere in the economy continue to expand their payrolls.
"Consumption is still growing," Macklem said. "It's growing modestly. It's certainly being restrained by the uncertainty caused by tariffs. But it is growing and we expect that to continue through the third and fourth quarters."
Last week the Bank of Canada kept its policy interest rate unchanged at 2.75 per cent in a third consecutive decision.
If the central bank were panicked about the Canadian economy's ability to withstand U.S. tariffs, Ercolao argued it would likely have lowered that rate.
The past week's GDP readings were good enough for BMO to raise its outlook for the third quarter into positive territory. Forecasters at the bank now expect Canada will avoid a technical recession this year.
BMO chief economist Doug Porter said in a note to clients Friday that Ottawa's personal tax cut at the start of the month and robust demand for domestic travel amid the trade war will boost the economy this quarter, as will "the less-dire sentiment" around economic forecasts.
Some other forecasters continue to pencil a tariff-induced recession into their outlooks.
In the Bank of Canada's monetary policy report released alongside the rate decision, it outlined one scenario for the economy assuming the tariff situation remains largely status quo.
Canada avoids a recession in that outcome. Growth in 2025 and 2026 remains overall positive, but half a percentage point lower than it would've been without the weight of tariffs.
Macklem told reporters that the Bank of Canada would expect the economy to keep growing even with today's tariffs in place, "but it'll be on a permanently lower path."
"Unfortunately, the sad reality is that tariffs mean the economy is going to work less efficiently," he said.
Porter said in his note that the actual impact of Trump's new 35 per cent tariff on Canada's economy could be less than headline figure suggests.
Because of a carve-out for Canadian exports that are compliant with CUSMA, BMO sees the effective U.S. tariff rate at roughly seven per cent under the new duties, less than a percentage point higher than where it stood before Friday.
But with CUSMA up for renegotiation in 2026, Porter said that 35 per cent tariff rate could loom as a "cudgel" over negotiations — taking full effect if the trade agreement expires without a new deal in place.
The Bank of Canada published a separate "escalation" scenario this week that would see the United States remove Canada's CUSMA exemption as it ramps up global tariffs.
Real GDP would drop an extra 1.25 per cent by 2027 in this more severe case; Porter said that this outcome would be "serious for sure, but far from disastrous."
Ercolao said much of the tariff doom-and-gloom earlier in the year was tied to the speed at which those import duties would be imposed.
But the on-again, off-again nature of U.S. trade restrictions to date has given businesses time to adapt to the new way of doing business and constant delays in implementation, he said.
"If we go back to when Trump began his presidency, had he went 100 per cent on his tariff plan right away, we probably would have seen a deep economic contraction just because it would have been so sudden," Ercolao explained.
"Now we've been afforded that time to at least try to mitigate some of the negative impacts from what these tariffs were expected to do to the Canadian economy."
This report by °µÍø½ûÇø was first published Aug. 4, 2025.
