Bank of Canada Governor Warns CUSMA Loss Could Trigger Recession

Bank of Canada Governor Warns CUSMA Loss Could Trigger Recession

Bank of Canada Governor Tiff Macklem has issued a stark warning about the potential economic consequences if Canada loses its preferential trade access to the United States under the Canada-United States-Mexico Agreement (CUSMA). In recent comments following a speech in Toronto, Macklem stated that such a scenario would likely push the Canadian economy into a recession, though he emphasized this is not the central bank's base-case forecast despite escalating trade tensions.

Base Forecast Versus Risk Scenarios

During an interview with the Financial Post, Macklem clarified the Bank of Canada's position, noting that while recession remains "a possible outcome", the institution's primary projection assumes Canada will retain its exemptions under the current trade agreement. The bank's baseline forecast anticipates that existing U.S. tariffs will remain in place, with economic growth projected at 1.1 percent in 2026 and 1.5 percent in 2027 under these conditions.

Macklem explained that the central bank has previously modeled more severe scenarios, including one where a universal 10 percent tariff is applied to all Canadian goods exported to the United States. "In those scenarios, we forecast a recession," he stated, highlighting the sensitivity of Canada's economy to trade policy changes.

CUSMA Review and Economic Resilience

The timing of these warnings coincides with the scheduled review of the CUSMA agreement this year. The Bank of Canada's January monetary policy report outlined several possible outcomes from this review:

• CUSMA being extended with limited modifications
• Significant alterations to the agreement making trade more expensive
• Member countries withdrawing from the North American trade pact entirely
• No agreement reached, requiring annual renegotiations until the pact expires in 2036

Macklem acknowledged the uncertainty surrounding these outcomes, stating "I don't know what's going to happen to CUSMA" while noting there's "a range of possible outcomes."

Despite this uncertainty, the Canadian economy has demonstrated notable resilience thus far, largely because nearly all Canadian exports to the United States remain exempt from tariffs under the current CUSMA framework. Macklem suggested that the gradual dissipation of trade policy uncertainty could help stabilize economic conditions moving forward.

Broader Economic Challenges and Adjustments

In his Toronto speech, Macklem placed the trade tensions within a broader context of structural challenges facing the Canadian economy. He identified three major headwinds:

1. U.S. tariff policies and protectionist tendencies
2. The emergence and integration of artificial intelligence technologies
3. Slowing population growth trends

"The more we adjust, the better off, the higher standard of living is going to be going forward," Macklem emphasized, noting that Canadian businesses are beginning to adapt to the new trade environment despite being only one year into what he described as the "U.S. swerve to protectionism."

Regarding artificial intelligence, Macklem described the technology's economic impact as mixed and uncertain, with research suggesting both augmentation of existing jobs and potential job displacement. Early indications suggest AI is particularly affecting entry-level job markets, though the full implications remain unclear.

The Bank of Canada governor concluded that Canada's economic fate will ultimately depend on how effectively the country adapts to these structural changes, with the pace and ambition of adjustment determining whether productivity growth recovers quickly or progresses more slowly in the coming years.