Canada’s Central Bank Releases Latest Economic Report
On April 11, 2025, the Bank of Canada published its latest economic report, indicating that the global economic outlook faces significant uncertainty following the United States’ announcement on April 2 to impose broad tariff measures on most trading partners. The report states that if these tariffs are fully implemented, the U.S. weighted average tariff rate will surge from approximately 2% to 22%, marking a record high in over a century. This move is expected to have profound implications for global growth and inflation.
In response to such dramatic changes, the Bank of Canada no longer provides a single baseline forecast scenario, but instead presents two possible development scenarios, each representing different trade policy directions and economic impacts.
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Scenario One: Tense Trade Relations but Gradual Easing
Scenario Two: Full Trade War Leading to Economic Recession
Major Global Economies Also Affected
Scenario One: Tense Trade Relations but Gradual Easing
In the first scenario, most tariffs imposed by the U.S. since the trade conflict are gradually lifted through negotiations, despite high uncertainty in the negotiation process, extending until the end of 2026. In this scenario, U.S. economic growth slows from 2.8% in 2024 to about 2% in 2025 and 2026, primarily due to trade policy uncertainty and a tight financial environment suppressing demand. However, strong momentum in corporate investment in artificial intelligence (AI) becomes an important support for growth. U.S. inflation expectations are projected to fall back to the Federal Reserve’s target of 2% by 2027. Overall, global economic growth is expected to slow to below 3% in 2025, with inflation continuing to align with the targets of various central banks.
Scenario Two: Full Trade War Leading to Economic Recession
If the situation deteriorates into a full trade war, representing the second scenario, U.S. tariffs not only remain intact but are further increased, triggering retaliatory measures from various trading partners. In this scenario, the U.S. economy enters a year-long recession starting in mid-2025.
The average GDP growth in 2025 and 2026 is projected to be 1.3 percentage points lower than in Scenario One. Household spending is hampered by weak real income and declining employment, while corporate investment and trade activities shrink significantly, leading to a decline in potential output.
Moreover, the prices of imported equipment and consumer goods rise due to tariffs, causing overall inflation to increase to 3% by mid-2026, approximately 0.5 percentage points higher than in Scenario One. Although weak oil prices and demand somewhat mitigate this, they are still insufficient to counteract the price pressures resulting from tariffs.
Major Global Economies Also Affected
In both scenarios, the Eurozone, Japan, and China are impacted. In Scenario One, the Eurozone maintains low growth at 0.8%, but due to increased fiscal spending in some countries (such as Germany expanding infrastructure and defense spending), it rebounds to about 1.4% after 2026. Scenario Two leads to weakened exports and rising import prices in the Eurozone, suppressing domestic demand and delaying recovery, resulting in an economic growth slowdown to 0.5% in 2025, gradually returning to 0.8% only by 2026.
In China, due to a weak real estate market and escalating trade reprisals, growth slows to 4.8% (Scenario One) and 4.6% (Scenario Two) in 2025. The Chinese government has stated that it will support businesses and households affected by the trade conflict through fiscal spending.
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