Canada Could Face Recession if CUSMA Is Lost Central Bank Governor Says

Canada could enter a recession if it were to lose preferential trade access to the United States under the CUSMA agreement, according to Tiff Macklem, Governor of the Bank of Canada. However, Macklem stressed that such an outcome is not part of the central bank’s base-case economic outlook, despite renewed trade tensions between Canada and the United States.

Speaking after a public address in Toronto this week, Macklem said a recession remains a possible outcome, but not the scenario currently guiding policy decisions.

The Bank of Canada’s current baseline outlook

The Bank of Canada is operating under the assumption that:

• CUSMA remains in place,

• Existing U.S. tariffs continue, and

• Trade-policy uncertainty gradually eases over time.

Under these assumptions, the Bank projects:

• 1.1% GDP growth in 2026, and

• 1.5% growth in 2027.

Macklem noted that uncertainty stemming from unpredictable U.S. trade policy has weighed on business decisions, but expects those pressures to diminish gradually.

Why Canada has remained relatively resilient

Canada’s economy has shown resilience amid trade uncertainty largely because most Canadian exports to the U.S. remain tariff-exempt under CUSMA.

This exemption has helped shield the economy from the full impact of U.S. protectionist measures.

Downside scenarios point to recession

In previous risk assessments, the Bank analyzed scenarios in which the United States imposed a 10% universal tariff on all Canadian goods.

Under those conditions, the Bank’s models indicated that Canada would likely enter a recession.

Macklem confirmed that such outcomes were part of earlier downside analyses.

CUSMA review adds uncertainty

CUSMA is up for formal review this year, with several potential outcomes:

• Extension with limited changes

• Significant revisions that increase trade costs

• Withdrawal by one or more member countries

• Failure to reach agreement, leading to annual renegotiations until 2036

“There is a wide range of possible outcomes,” Macklem said.

Structural challenges beyond trade

Macklem also highlighted broader structural challenges facing the Canadian economy, including:

• Trade protectionism

• Artificial intelligence

• Slowing population growth

While AI poses short-term risks to certain jobs, he argued it has the potential to boost productivity over time, likening its impact to the internet revolution of the late 1990s.

Outlook

While the loss of CUSMA would represent a significant economic shock, the Bank of Canada continues to assume that the agreement remains intact.

How effectively Canada adapts to shifting trade conditions and structural change will play a key role in shaping its long-term economic trajectory.

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