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While economic forecasts that are being made in an ever-shifting U.S. trade policy environment have a particularly short shelf life, BMO Capital Markets is now expecting a recession in Canada and a slump for the U.S. economy, amid ongoing trade conflict.

In a report released on Monday, the firm’s economists say that current trade policy expectations — which assume that the U.S. tariffs on Canadian exports that are set to take effect on April 2 will remain in force for a year and will be met with retaliation from Canada — will reduce economic growth on both sides of the border this year.

“Canada’s economy will suffer serious, though not life-threatening, wounds in the first major assault of the trade war,” the report said — indicating that the new duties “could result in the Canadian economy contracting for two quarters, reducing real GDP growth by 1.5 percentage points this year to just 0.5%.”

At the same time, “The U.S. economy will not be unscathed, with annual growth expected to drop below 2% for the first time in five years,” it said — as higher tariffs and government layoffs weigh on spending and investment.

Additionally, the declining stock market could amplify that weakness in U.S. consumer demand. 

“If equity markets decline further, the wealth effect will reverse, dragging consumer spending down with it,” the report said.

BMO noted that its current forecast for Canadian GDP growth this year is below the consensus, which still expects output growth of more than 1% this year.

Against this backdrop, the report said that the Bank of Canada is expected to lower rates by an additional 75 basis points this year as it focuses more on rising unemployment than worrying about resurgent inflation.

“The expected economic downturn could lead to more than 100,000 net job losses and push the unemployment rate to 8.0% by year-end, up from 6.6% in February,” it said.

At the same time, inflation is expected to rise, as the Canadian dollar weakens further — with inflation potentially rising to 2.7% in the coming months, before easing back below the 2% mark by next year amid rising job losses.

For its part, the U.S. Federal Reserve Board, “will likely resume easing in September,” the report said — with the Fed ultimately lowering rates by 125 bps through 2026. 

“However, the extreme uncertainty also increases the risk of a policy misstep, where the Fed may need to address stubborn inflation at the expense of growth. In this event, the soft landing the Fed worked hard to engineer may become the greatest casualty in the trade war,” it said.

Indeed, the economic outlook on both sides of the border is particularly uncertain, given the volatile policy environment, the report noted.

“The shelf life of economic forecasts is now measured in days, even hours, due to the U.S. administration’s unpredictable trade policies. Uncertainty alone is harming investment, especially in Canada given its elevated exposure to trade,” it said.

“With the U.S. administration threatening ‘economic force’, Canada faces an unprecedented level of risk,” the report said, noting that the steel and auto industries are particularly under threat.

“Potential reciprocal tariffs and industry-specific duties on April 2 could amplify the damage, prolonging and deepening the expected recession. The motor vehicle industry would be decimated in a worst-case scenario,” it warned.