Economic outlook: Tariff-driven slowdown won’t tip Canada into recession, RBC says

Although the Royal Bank of Canada is not predicting a recession in Canada — unlike several other financial institutions — the impact of U.S. tariffs is expected to bring on a material economic slowdown.

“We are not forecasting a recession… and I’m here to tell you they [others] will be wrong,” said Rachel Battaglia, economist with RBC, during the CITT’s annual Canada’s Logistics Conference in Toronto in June. “Whether you have one slightly negative quarter or two… you probably won’t notice the difference.”

Battaglia also pointed out that despite the recent increase in tariffs, Canada is still the least-tariffed nation in the world, with countries like China, South Korea, Japan, the U.K. and even Mexico seeing higher tariff rates.

She said Canada’s growth forecast for 2024 and 2025 remains stable at 1.5 per cent, while the U.S. is expected to drop from 2.8 per cent in 2024 to 1.3 per cent in 2025. For 2026, RBC predicts Canada will see one per cent economic growth, while the U.S. will reach 1.2 per cent.

The impact of U.S. tariffs will also vary by province. Provincial exposure to U.S. demand is highest in Alberta, where nearly 35 per cent of the province’s GDP (merchandise) is exported to the U.S. Canada as a whole exports approximately 18 per cent of merchandise to the U.S.

Ontario and Quebec are expected to be most affected by targeted U.S. tariffs on specific industries.

“Canada does still face now 50 per cent tariffs on Canadian steel and aluminum as of yesterday… and a lesser 10 per cent tariff rate on energy,” said Battaglia. “Fifty-seven per cent or so of goods were eligible for CUSMA, but not yet using it… that number has shrunk. Primary metal manufacturing, autos, aerospace — extremely high reliance on U.S. demand.”

She added that U.S. tariffs, along with Canada’s retaliatory tariffs, could reignite inflation, which has eased since peaking in 2022–23, and may impact interest rates.

“Tariffs are threatening to reignite inflation in the very near term in both Canada and the U.S.,” she said. “If we weren’t in the middle of this trade war escalation, we could have seen the Bank of Canada end its rate-cutting cycle here.”

Consumer confidence is also at record lows in Canada, while spending remains stable, with a focus on “maintenance spending” — smaller, essential purchases.

“In March, [consumer confidence] fell to the lowest level we’ve ever seen on record — worse than COVID-19,” said Battaglia. “Consumers are keeping their heads and spending pretty much as normal.”

Labour market outlook

Immigration will also decline after record highs in 2023 and 2024. As Battaglia noted, Canada now plans for a net outflow of non-permanent residents this year and next, which could risk labour shortages in certain sectors.

“Newcomers also contribute to demand for labour just as they may offer a unit of supply,” she said, adding that the recent increase in the jobless rate is due to Canada’s population growth outpacing job creation.

Though not as severe as during the pandemic, Canada is seeing job losses, particularly in manufacturing and in Ontario.

“Ontario’s unemployment rate is now the second highest in Canada,” said Battaglia.