Canada weathers trade storm — but economic fundamentals hold, IMF says
Chris Uba
Despite a wave of U.S. tariff increases in 2025 that rattled North American supply chains, Canada’s economy has held up “better than expected,” according to a new report by the International Monetary Fund (IMF).
The IMF’s 2025 “Article IV” mission — a routine, high-level economic review conducted every year — notes that while exports, investment, and some manufacturing output fell back in mid-2025, the economy did not collapse — thanks largely to a mix of company adjustments, government support and favorable monetary policy.
What Went Wrong — and What Cushioned the Blow
The stimulus for concern: U.S. tariff hikes disrupted key supply-chains linking Canada to its southern neighbour, pushing up input costs and squeezing trade-exposed industries. Exports slowed, and business investment weakened.
But structural buffers and policy steps helped soften the hit:
Firms were spared worst-case damage thanks to earlier supply-chain readjustments and exemptions under the CUSMA trade agreement.
On the fiscal side, the federal government’s 2025 budget — which included targeted support for affected firms, business investment incentives, and relief measures — injected stability at a time of external shock.
On the monetary front, controlled inflation (near 2 percent) allowed the central bank to cut its policy rate to 2.25 percent, offering breathing room for households and businesses.
IMF
Economic Outlook: Modest but Manageable Growth
While the IMF projects Canada’s real GDP growth for 2025 to slow — with output likely to remain below potential through 2026 — the institution says core inflation should hover around 2 percent and the current account deficit is expected to narrow gradually, helping stabilise the external balance.
“Canada retains strong macro-fundamentals,” the report says — including a positive net international investment position (NIIP) and secure access to external financing — which provide a buffer against global volatility.
What This Means in Dollars
Although some export-dependent firms saw revenue and profit drops in 2025, the combination of fiscal support and lower borrowing costs helped avert layoffs and business closures in key sectors — saving an estimated billions of Canadian dollars in potential economic losses.
Moreover, a renewed emphasis on investment — underpinned by 2025’s generous tax incentives and public-investment frameworks — is expected to channel fresh capital into infrastructure, clean energy and R&D in 2026 and beyond. These investments, in turn, could boost Canada’s productivity and long-term output growth.
Finally, with monetary policy now more accommodative and inflation under control, consumers and businesses may enjoy lower borrowing costs. That could revive consumption and business expansion — helping blunt the impact of the export slump and trade uncertainty.
The Road Ahead: Caution — but Optimism
The IMF cautions that risks remain: renewed tariff escalation, tougher global financial conditions or a sharp slowdown in commodity demand could still hurt Canada’s recovery.
But with a pro-growth fiscal framework, better-targeted public investment, and monetary policy aligned to support demand — while preserving financial stability — Canada appears positioned to navigate the turbulence. Experts say the economy’s resilience may well mean billions in saved output, stabilized jobs, and substantial new investment flows in the coming years.
