During a speech by the Bank of Canada governor Tiff Macklem’s in St. John’s, N.L., the governor discussed how trade disruptions caused by U.S. tariffs on Canadian steel, aluminum and motor vehicles have impacted the Canadian economy. Retaliatory tariffs also remain in place on nearly $60-billion worth of U.S. goods.
The governor said the impact of these tariffs on inflation has proven to be complicated, with additional firmness in consumer price index (CPI) data in April, when measures of core inflation began heating up.
Last month, the Bank of Canada decided to hold its policy rate at 2.75 per cent for the second time in a row as uncertainty over U.S. trade policy remains high.
Headline inflation came in at 1.7 per cent, but it came in closer to 2.3 per cent when you don’t account for the consumer carbon tax removal, above what the central bank expected. At the same time, a slowdown in Canadian exports is putting a drag on economic growth.
“Restoring open trade between our countries is critical to jobs and growth in Canada,” Macklem said during a speech in front of the St. John’s Board of Trade. “It is also important for prices and inflation.”
“But if tariffs are not removed, we expect they will be passed on through consumer prices,” he said. “These economic impacts underline the importance of a new trade deal with the United States.”
Macklem said a slowdown in the economy will soften demand, but tariffs also give companies something to blame for higher prices when costs are passed on from businesses to consumers.
“That may make it easier for them to pass on the cost of tariffs,” he said. “And higher inflation expectations could also make it easier because people won’t be surprised to see higher prices.”
During the 2018 tariff conflict with the first Trump administration there was a 10 per cent retaliatory tariff on final goods, which remained in place for about a year. “During that conflict, the pass-through from price increases to consumer goods was high, but incomplete,” he said. “If the current tariffs and counter tariffs remain in place, past experience suggests pass-through of about 75 per cent of the costs of tariffs over roughly a year and a half.”
In the first quarter of this year, Canadian goods exports surged by 10 per cent as businesses tried to get ahead the tariffs. However, Canadian exports to the U.S. dropped by more than 15 per cent in April.
“This reflects both the payback from the first-quarter surge and the fact that tariffs are making Canadian goods more expensive in the United States,” Macklem said. “In April, exports of steel and aluminum products fell 11 per cent and 25 per cent, respectively, and motor vehicle exports were down almost 25 per cent.”
In May, the unemployment rate hit 7 per cent as employment in trade-sensitive sectors has declined since the beginning of the year, with manufacturing jobs down by 55,000 since January. However, employment in other sectors has held steady for now, but Macklem warned that the labour market usually responds with a lag.
“Final domestic demand was soft in the first quarter, and if tariffs and uncertainty were to continue, households and businesses will likely remain cautious,” he said. “If demand stays soft, at some point, more businesses will cut jobs.”
Macklem indicated the governing council agreed that further rate cuts will be needed to help a slowing economy and deteriorating labour market if inflation remains contained.
“The recent progress toward a new trade deal is encouraging, and we are following developments closely,” he said. “We are all invested in the future of the trade relationship between Canada and the United States.”
Source: Financial Post
