The Canadian economy would likely fall into recession if the country loses preferential trade access to the United States under the Canada-United-States-Mexico Agreement ( CUSMA ), but that is not the Bank of Canada ‘s base-case scenario despite a recent flare up in trade tensions, governor Tiff Macklem said this week. In an interview with the Financial Post following a speech in Toronto this week, Macklem reiterated that though recession is “a possible outcome,” the bank’s base forecast is still that Canada retains its exemptions under the current agreement but that U.S.

tariffs currently in place stay in place. Under those assumptions, the bank is projecting 1.1 per cent growth in 2026 and 1.5 per cent in 2027.

“We also assume that the uncertainty that businesses are currently facing, given the erratic, unpredictable nature of U.S. trade policy … gradually dissipates,” he said.

The central bank returned to a baseline forecast in October, but had previously run through scenarios in which a universal tariff is applied to Canadian goods.

So far, the Canadian economy has proven to be more resilient in the face of trade uncertainty with the U.S., but that is due to nearly all Canadian exports to the United States remaining exempt from tariffs under CUSMA.

“In some of the speeches I gave, we had scenarios, for example, with a universal tariff of 10 per cent on all Canadian goods,” Macklem said. “In those scenarios, we forecast a recession.”

The CUSMA agreement is up for review this year. In the risk section of its January monetary policy report, possible outcomes of that review included CUSMA being extended with limited changes or CUSMA being significantly altered, with trade becoming more expensive. A third possibility is that members withdraw from the North American trade pact altogether while the fourth scenario is that no agreement is reached and countries must renegotiate every year until the agreement expires in 2036.

“I don’t know what’s going to happen to CUSMA, it’s under review,” said Macklem “There’s a range of possible outcomes.”

Macklem noted we’re only one year into the U.S. swerve to protectionism, but there are signs that Canadian businesses are adjusting.

“That is encouraging, but there’s a long way to go,” he said. “The more we adjust, the better off, the higher standard of living is going to be going forward.”

In his speech Thursday in Toronto, Macklem said the changes posed by U.S. tariffs, artificial intelligence and slowing population growth are structural in nature, and how well we do will depend on how well the Canadian economy adjusts to these headwinds.

“We could adjust more boldly, with more ambition; it could go faster, and in which case, our productivity growth would recover more quickly,” he said. “It could also go more slowly.”

The impact of AI on the Canadian economy is also uncertain, as the technology has potential downside and upside risks.

Macklem said it remains mixed, with some research suggesting it will augment how people do their jobs, while other research says it will replace jobs. So far, AI seems to be having an impact on the entry-level job market.

Macklem said he does think AI will boost productivity, as it is general purpose technology, likening it to the advent of the internet in the late 1990s.

“And what did we see in the second half of the ’90s? We did see a productivity boom in Canada, and if you’ll remember, it was a period of strong growth with low inflation,” he said.

“We didn’t need to raise interest rates a lot given because the internet was increasing productivity, so we could get more growth without adding inflationary pressures.”

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