How U.S. Tariffs Could Reshape Canada’s Economy: OECD Report

Canada’s Economy Faces Potential Challenges from Tariff Policies, Warns OECD

The Organization for Economic Co-operation and Development (OECD) has revised its outlook for Canada’s economy, citing potential disruptions from U.S. tariff policies. The report suggests that a full-scale trade conflict could lead to higher inflation and rising interest rates, countering Canada’s recent economic momentum.

Growth Forecast Cut Amid Trade Uncertainty

The OECD now projects Canada’s gross domestic product (GDP) to expand by just 0.7% in both 2025 and 2026, a sharp downgrade from its previous forecast. The primary concern is that businesses and consumers may hesitate to invest or make major purchases due to uncertainty surrounding trade policies.

Canada is among several countries expected to experience slower growth, with Mexico facing the most significant contraction, while the U.S. is also projected to grow at a reduced pace of 2.2% in 2025 and 1.6% in 2026. However, if tariff exemptions under the Canada-United States-Mexico Agreement (CUSMA) remain in place, Canada’s growth outlook could improve, potentially reaching 1.3% over the next two years.

Inflation Pressures and Market Reactions

The OECD warns that if widespread tariffs are implemented, Canada’s inflation rate could surge, reaching 3.1% in 2025 before slightly easing to 2.9% in 2026. Core inflation could also rise beyond the Bank of Canada’s target range, increasing the likelihood of market volatility and influencing consumer and business spending decisions.

Central banks typically monitor inflation expectations closely, as they influence wage demands and pricing strategies. The OECD notes that while inflation expectations had been aligning with central bank targets, recent developments suggest renewed upward pressure in both Canada and the U.S.

Potential Interest Rate Increases

To counter rising inflation, the Bank of Canada may need to raise interest rates significantly. While the central bank recently lowered its key rate to 2.75%, the OECD warns that, in a worst-case tariff scenario, rates could increase by 1 to 1.25 percentage points—considerably higher than the average 0.25 to 0.5 percentage point increase projected for other major economies.

The OECD highlights that higher borrowing costs could persist if tariff-related inflation continues to impact consumers. However, if trade tensions ease and a more moderate tariff environment prevails, the Bank of Canada may have flexibility to maintain or even lower rates to support economic growth.

Outlook Dependent on Trade Policy Developments

While Canada’s economic prospects remain uncertain, the trajectory will largely depend on upcoming trade policy decisions. If exemptions under CUSMA are extended and retaliatory tariffs are minimized, growth could stabilize, and inflationary pressures may ease. Conversely, a broad-based tariff war could lead to prolonged economic headwinds, requiring careful monetary policy adjustments.

As global trade policies evolve, businesses and consumers will need to navigate a complex economic landscape, with interest rates and inflation remaining key factors in shaping Canada’s financial outlook.

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