At the Bank of Canada, we are proceeding carefully with monetary policy. We want to see through the noise to set policy that supports the economy while ensuring inflation remains low and stable for Canadians.
The trade conflict has disrupted Canadian exports
To understand how the trade conflict has affected Canadian trade, we have to look at where we were heading before tariffs.
Canadian exports were growing in 2024 as the global economic recovery gained momentum, and the Bank expected them to continue to strengthen.1 In our January Monetary Policy Report—the last one before the trade war—we forecast goods exports would grow roughly 2½% in 2025 and 3½% in 2026, outpacing overall growth in gross domestic product (GDP).
That all changed with the inauguration of President Trump. Since February, the United States has imposed, suspended, re-imposed and partially rolled back tariffs on many countries. For Canada, the most important tariffs that remain in place are on motor vehicles, steel and aluminum, and these have had a big impact on Canadian exports.
The changes in US trade policy have caused shifts in Canadian trade across two dimensions. They’ve changed the timing of exports and imports. And they are changing the destination of shipments.
First, timing. To get ahead of tariffs, businesses that export to the United States immediately shipped as much as possible. Canada’s goods exports rose 10% in the first quarter of 2025 from the fourth quarter of 2024 (Chart 1). Exports of machinery and equipment and motor vehicles led the surge, but lumber, as well as consumer goods like food and pharmaceuticals, also rose sharply.
First-quarter imports were also up as Canadian importers stockpiled US goods, building inventories before costs rose.
The surge in trade and inventories boosted the economy—Canadian GDP growth was 2.2% in the first quarter.
But getting ahead of tariffs borrowed activity from the future, and we’re now seeing a sharp reversal. Canadian goods exports to the United States dropped more than 15% in April. This reflects both the payback from the first-quarter surge and the fact that tariffs are making Canadian goods more expensive in the United States. In April, exports of steel and aluminum products fell 11% and 25%, respectively, and motor vehicle exports were down almost 25%.
Tariffs and uncertainty have weighed on employment
As exports weaken, the rest of the economy feels the slowdown. How much economic activity and employment slow will depend on the scope and duration of tariffs as well as on how Canadian businesses and governments respond.
We are already seeing the direct impact of tariffs on Canadian jobs in trade-intensive industries. But so far, employment has held up in other industries. To understand where employment goes from here, let me explain how the labour market usually reacts to changes in the economy.
Employment typically adjusts slowly to changes in economic activity. It’s easy to understand why. Hiring workers—finding the right match—is time-consuming and expensive. So is training new workers. That’s why, when demand picks up, employers typically begin by asking people to work longer hours. That’s fine for a while, but if the strong demand persists, businesses start to increase hiring. So employment tends to pick up with a lag when the economy is strengthening.
Inflation is . . . complicated
At the Bank, we are focused on where inflation is going—the underlying trend. That’s why it is so important to understand the forces at work on inflation—which ones are temporary and which ones may last. That’s easier said than done—and right now, it’s complicated.
Once again, I’ll start with where we were before tariffs. Headline inflation was back down to the 2% target last summer. Core inflation, which strips out volatile components like energy, was still a bit higher than headline. But by the end of 2024, there were no signs of broad-based price pressures, and inflation expectations had largely returned to normal. Monetary policy had worked to restore low inflation.
But then US tariffs arrived. Assessing the inflationary impact of tariffs has been a moving target because the United States has repeatedly changed the size and scope of tariffs. The prospect of a new Canada-US trade deal offers hope that tariffs will be removed. But until we have a deal, inflation will be affected by both US tariffs and Canadian counter-tariffs. So let’s consider what each of these could mean for inflation.
I’ll start with US tariffs. As we’ve seen, tariffs have lowered our exports and weighed on employment. That puts downward pressure on inflation in Canada. However, the increase in US tariffs raises prices in the United States, and that can spill over into Canada when we import those higher-priced US goods, putting upward pressure on inflation here.
Then there are the Canadian counter-tariffs. These also make US imports more expensive and put upward pressure on inflation.
The net effect of tariffs on inflation is difficult to gauge. It’s not as easy as saying a 10% tariff will increase the price of a product by 10%.
The pass-through of higher costs from tariffs will depend importantly on demand and on inflation expectations. If the economy slows and employment continues to weaken, the drop in demand will make it harder for businesses to raise prices to reflect the full cost of tariffs. On the other hand, tariffs give companies something to blame for higher prices. That may make it easier for them to pass on the cost of tariffs. And higher inflation expectations could also make it easier because people won’t be surprised to see higher prices.
Read the full article by St. John’s Board of Trade / Bank of Canada
