Canada could face second-largest recession in history if trade war erupts.
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Canadians could face the largest non-pandemic recession in their history in a matter of weeks. That's the theme of a new report from the National Bank of Canada (NBC), which examines the Bank of Canada's (BoC) model for a similar tail risk in 2019. The conflict would hit both countries hard, with the impact expected to be much greater. Canada would see $1 in 16 of its GDP disappear in a matter of weeks, dealing an unprecedented economic blow to the country.
Canada to lose 6% of GDP in trade war with the United States
The six major banks are diving into the figures reported by the BoC, which they obtained in 2019. The central bank has modeled the impact of the United States imposing a 25% tariff on Canada and the reciprocal measures that would be imposed. Incidentally, this is what the new American administration is proposing.
"The BoC estimates paint a bleak picture for Canada: exports and investment would be hit hard, while consumption would weaken due to worsening labor market conditions and unfavorable terms of trade," explains Matthieu Arseneau, deputy chief economist at FNB.
Source: FNB.
The bank's figures show that this would cause one of the largest recessions in Canadian history. Projections show that real GDP has fallen by 6%, surpassing all recessions except the 2020 recession. This blow would be closer to a more traditional recession, as the United States will look elsewhere to make up for it, leading to a significant loss of industry. Six percent may not seem like much to the average person, but it is an astronomical amount. To put this into context, the Canadian economy could lose Nova Scotia, New Brunswick, Prince Edward Island, the Northwest Territories, Nunavut, and the Yukon, and it wouldn't even be a 6% loss of GDP for the country. The US economy would also be affected, but not as much as Canada's.
The bank warned that Canada would not be the only loser in a trade war. "The US also faces challenges, battling stagflationary pressures marked by sluggish economic growth combined with rising inflation," Arseneau noted.
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Markets are becoming aware of the threats to growth. The yield on the 10-year US Treasury note has risen by 100 basis points in just a few weeks. This has led to significant uncertainty, which the bank said should serve as a warning signal for global trade. "One can only hope that this serves as a warning to Mr. Trump of the significant negative consequences that his aggressive protectionist agenda could impose on American businesses and the economy as a whole," he added.
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