US tariffs and Canadian retaliation will have devastating effects on the economy and will reduce growth while rekindling inflation, said Bank of Canada Governor Tiff McClem.
“A new crisis is on the horizon. If US tariffs occur as threatened, the economic impact will be severe.”
However, unlike inflation that followed the Covid-19 pandemic, in this scenario, the Bank of Canada has no tools in its toolbox to mitigate the catastrophic impact on the economy. Hmm, Macklem said in his speech Friday. An event held by the Mississauga Trade Commission and the Oakville Chamber of Commerce.
A better economy compared to a few years ago would help, McClem said, but he warned that shocks from tariffs are very different from the economic shock of the Covid-19 pandemic, he said .
“The pandemic has had a sharp recession that recovers rapidly as the economy reopens,” he said.
“This time, if tariffs last longer and are based on widespread coverage, there is no bounceback. You can ultimately regain the current growth rate, but the level of output will be permanently lower. That’s more than a shock It’s a thing and a structural change.”
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US President Donald Trump threatened drastic tariffs on Canadian goods to begin in March. Canada retaliated with its own tariffs on US imports.
If the US imposes threatened tariffs and Canadian retaliation, Canada’s economic growth will be hit while inflation could also rise, McClem said.
Thresholds in export sales as a result of tariffs will reduce household income, but retaliatory tariffs will result in inflation in US goods entering Canada, he said.
“While new tariffs have not yet been incurred, uncertainty about US trade policy has already affected our economy, and the consequences could be severe if the US launches a prolonged trade war. There is.”
Bank of Canada can help the economy adapt to the trade shock by lowering interest rates to support consumer demand, McClem said.
However, he added that the central bank cannot lower too many fees without risking adding fuel to the inflation fires.
The Bank of Canada has quickly cut interest rates over the past few months as inflation eased from highs while the economy was stagnating.
Rooney said it has weakened in recent months as rates drop, and Macclem said the trend could continue amid the trade war.
McClem said it would export about a third of Canada’s national income to the United States.
McClem said the long-standing public trade between Canada and the US has benefited both countries.
“A significant increase in tariffs would reverse all of this,” he said.
The Bank of Canada hiked fees from near-zero to combat inflation that robbed the economy before beginning to cut interest rates last year.
While the Bank of Canada’s ability to respond to tariffs could be limited, Macclem highlights several ways governments can make positive structural changes to help Canada survive the storm I did.
Both are issues that business groups have been seeking change even before tariffs arose.
One is productivity issues. Macklem admitted it was a “a little instigmatic concept,” but said it would lead to higher wages for workers, making businesses more competitive in families and globally.
“Because of monetary policy, that means the economy can grow more without inflationary pressure,” he added in a session of questions and answers after the speech.
The Bank of Canada has already issued a warning about Canada’s low productivity, McClem said, “And if you have time to break the glass, that’s now.”
Macklem also highlighted the barriers to the prone trade, saying this time he hopes Canada can see some movement in years of dissatisfaction from the business.
Such barriers are one of the things the governor called “my goals,” and if resolved, will better protect the domestic economy from external challenges.
“We have almost all of the regulatory differences between states that are hindering the flow of goods and services across the country as we add costs,” he said.
“We can harmonize them, or we can recognize regulatory differences across the country with each other.”
