Tariff will hurt, but escalation risks a recession, economists warn

Prime Minister Mark Carney talks during a press conference at the Davie Shipyard in Levis, Que., Aug. 24, 2026. Photo by Francis Vachon/Postmedia

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U.S. tariffs that went into effect on Saturday are likely to slow Canada’s economic growth, but it’s the risk of escalation on both sides of the trade war that poses a bigger threat to country’s outlook, economists said Monday.

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Minutes before Friday’s midnight deadline for a deal to avert the new 50 per cent U.S. levies on approximately $29-billion-worth of Canadian goods, Prime Minister Mark Carney said Canada was withdrawing from talks with it’s largest trading partner due to unacceptable “last-minute changes” from U.S. officials.

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Carney pledged to match the new Section 338 levies dollar-for-dollar, with the retaliatory tariffs coming into effect the day after Labour Day.

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Most economists projected the original U.S. tariffs could shave up 0.2 to 0.6 percentage points off Canada’s gross domestic product growth next year, but the tit-for-tat responses, deteriorating rhetoric between the two sides and potential for even greater escalation have some warning of wider consequences.

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“While unlikely, escalating trade tensions means the risk of the (Canada-U.S.-Mexico Agreement) unravelling has increased, which would plunge Canada into recession and leave it on a permanently lower growth path,” Tony Stillo and Michael Davenport of Oxford Economics in a note on Monday afternoon.

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The pair said Carney’s retaliatory tariffs would likely dampen economic growth on top of the drag from the Section 338 levies and modestly increase consumer prices, but wouldn’t cause a recession. They forecast the combination will reduce Canada’s GDP by 0.3 percentage points while lifting consumer prices by around 0.3 percentage points next year.

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“Most (more than 80 per cent) of Canadian exports to the U.S. would remain tariff free under new tariffs — but the unpredictability of U.S. administration tariff policy means it is not possible for businesses to predict which sectors might be next. And that unpredictability is a weight on business confidence across all trade-exposed industries, not just those directly targeted with tariffs,” the analysis read.

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“Still, businesses have been showing signs of adapting to living under uncertainty after a year and a half of tariff threats, with measures of business confidence and investment perking up to-date in 2026.”

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Peter Morrow, an economics professor at the University of Toronto, said Canada’s retaliatory tariffs are essentially taxes on U.S. imports, which will raise prices and reduce trade. However, the impact on the average consumer will likely be minimal because the levies will be imposed on goods that most Canadians don’t buy on an everyday basis.