While the U.S. has begun backing down on certain tariff threats, the uncertainty created by erratic U.S. trade policy is starting to drag on the Canadian economy — which will likely prompt rate cuts to resume next month, says National Bank Financial Inc. (NBF).
In a new report, NBF said that, while the effective tariff rate remains relatively low for now, the uncertainty created by ever-shifting U.S. policy is having real economic fallout, as “businesses are being paralyzed by the lack of visibility.”
“While investment intentions pointed to a recovery in 2025 a few months ago, the situation has changed dramatically, with many projects now on hold,” it said, citing data from the latest business outlook survey — which saw investment intentions drop at rates only matched by previous major negative shocks, such as the financial crisis and the pandemic.
The effect of this elevated uncertainty “is also beginning to be reflected in the labour market, which is showing signs of weakening again,” NBF said — noting that hiring intentions have dropped to their lowest level in years, the jobless rate rose over the past couple of months, and private sector employment fell by 75,000 jobs.
The elevated uncertainty is also weighing on the housing market, it noted.
“Residential property sales are down 31% since last November, reaching levels last seen during the pandemic or the 2008-2009 recession,” it said.
Against this backdrop, NBF is currently forecasting a modest recession in the second and third quarters, with full-year GDP growth of just 1.1% in 2025, and unemployment rising to 7.4% in the fourth quarter.
In response, NBF is expecting further rate cuts from the Bank of Canada.
“Given the deterioration in economic conditions, we believe that the pause in the BoC’s monetary policy easing will be short-lived and that interest rate cuts will resume in June,” it said.
While signs of renewed inflation may have kept the central bank on the sidelines in April, “this revival in inflation is likely to have been a temporary anomaly,” NBF said.
“For now, our interest rate strategists anticipate a cut in the key rate to 2.0% by the end of the year, which would be sufficient given that the federal government also intends to step in to limit the economic damage,” it said.