Mark Carney’s victory in Canada’s election on 28 April was partly due to the recent US trade policy volatility, which helped drive an exceptionally rapid shift in the polls towards the Liberal Party.

Approximately 80% of Canadian exports to the US are covered by the USMCA free trade agreement and currently not tariffed, and this share is likely to rise further over time. However, Canada faces steep 25% sector-specific tariffs on some of its key exports to the US. And the future of the USMCA itself is uncertain as the deal is due to be renegotiated later this year.

In our tariff baseline, the continuation of the USMCA may just about allow Canada to avoid a recession but not a severe slowdown. And the economy is extremely vulnerable to further US tariff increases.

Carney’s plans to remove internal trade barriers and increase infrastructure investment may help boost long-term growth prospects, but this is all likely to be swamped by tariff uncertainty for now. 

As such, having paused in its rate cutting cycle in April, the Bank of Canada will likely continue lowering interest rates.

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