A possible trade war with the U.S. is dominating economic forecasts for 2025. At an Economic Club of Canada event Thursday morning, chief economists from five of Canada’s largest banks said the threat of a 25 per cent tariff on all Canadian goods into the U.S. will curtail the country’s growth, just as interest rate cuts and calming inflation were poised to lift the economy. 

As they brace for impact, however, they say the threat could give policymakers the kick they need to strengthen industries like the resource sector and create a more competitive tax system, ultimately boosting Canada’s sluggish productivity. 

Here’s what you need to know: 

Trade war would inflict immeasurable pain: Just how badly blanket tariffs would impact Canada’s economy is impossible to quantify right now, said CIBC chief economist Avery Shenfeld, but, he said, it would undoubtedly hurt. The steel tariffs the U.S. imposed on Canada in 2018, for instance, caused GDP growth to slow about 0.5 per cent in one year from what it would have otherwise been, said Shenfeld. “Multiply that across the economy,” he said. “It’s bad.”

A freeze on business investment: Stéfane Marion, chief economist at the National Bank of Canada, said business investment in Canada will stop in the run up to tariffs being applied. “That’s a given,” he said. A July 2024 report from Statistics Canada already pegged low business investment—which dropped 20 per cent per worker from 2014 to 2022—as the most significant factor contributing to slow productivity growth. 

Time to fix the economy: Marion and his peers said the looming tariff war creates an urgency to improve parts of Canada’s economy that have been dragging down growth. The list is long, said RBC chief economist Frances Donald, from reducing regulatory burdens—like the amount of time it takes to get building permits—to breaking interprovincial trade barriers.

Beata Caranci, chief economist at TD, said overhauling the tax system—which she said discourages high net-worth and entrepreneurs—could help establish Canada as an attractive place for business. The country should also hone its natural resources sector—specifically oil and gas and critical minerals—to stay competitive and ensure it is indispensable to the U.S., she said. “We have huge advantages and that’s why we’re getting attacked,” she said, referring to Trump’s threat to annex Canada. 

What a Conservative government could mean: If public opinion polls are correct and the Conservatives win the next federal election, Shenfeld expects a smaller government, tax cuts and fewer regulations, with an emphasis on supporting the oil and gas sector. Housing and immigration goals, meanwhile, may be similar to the Liberal government’s, though the levers for achieving them could differ. But, Shenfeld added, there’s a lot of uncertainty around how the economy would fare under the Conservatives. “It’s typical for a Canadian opposition party,” he said. “When you’re winning, don’t provide too many details.”